Bank of England Member Martin Weale says Interest Rates Must Rise in the UK

Bank of England, BOE, member Martin Weale spoke today at the Finance Directors' Strategy meeting in London stating that the BOE should raise interest rates now to prevent more aggressive tightening further down the road.

Weale, who has voted for a 25bps increase since January, said an early interest rate increase may dampen the economy somewhat but the bank would gain leeway to slow or even reverse the tightening process later if needed.

Weale notes that in the United Kingdom "...there is still a substantial risk that the headline inflation rate will rise above 5 percent per annum later this year."

Here are his conclusions from the text of his speech:

I began by observing that the May Inflation Report forecast sets out clearly that there is a need for monetary policy to tighten. Arguments can be produced for delaying the start of that tightening process. But there are significant risks to delay. The belief that delay is - as the market yield curve shows - possible does not mean that it is a good thing. But equally it needs to be understood that an early rise in rates does not itself imply that, averaged over the next three years, monetary policy is on average, going to be tighter than the market curve, even after its recent fall, suggests. What it will do is reduce the speculation that the Bank has departed from its inflation mandate. This itself will reduce the subsequent risks and may, indeed, mean that, averaged over the next three years, monetary policy does not need to be as tight as the current yield curve suggests. I should finish by pointing out that I think these arguments remain valid even if inflation is expected to be appreciably weaker than was forecast in May. Even with weaker expected inflation it remains likely that more than a trivial increase in Bank Rate will be needed over the next two years and that beginning the process will make it much easier for the Bank to preserve its credibility should inflation turn out to be higher than expected.