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Waiting too long to raise interest rates from its current record low of 0.5 per cent risks damaging Britain's economic recovery, one of the Bank of England's policy makers has warned.
MIT professor Kristin Forbes, who sits on the Bank's monetary policy committee (MPC) said keeping rates low while the economy was growing and wages were rising could create "distortions".
Writing in the Daily Telegraph, she said China's recent decision to devalue the yuan and falls in energy prices meant the MPC had a "bit more time before inflationary pressures build" - but warned that to hold off on increasing interest rates could mean they shoot up faster than expected in future.
With such low inflation today, it is understandable to want to avoid pre-emptively ending this holiday.
A solid recovery is finally here. Increasing interest rates prematurely could moderate companies’ willingness to invest and consumers’ willingness to spend. But unfortunately monetary policy works with lags.
Maintaining interest rates at the current low levels during an expansion risks creating distortions. Therefore, interest rates will need to be increased well before inflation hits our two per cent target.
Waiting too long would risk undermining the recovery - especially if interest rates then need to be increased faster than the gradual path which we expect.