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.
The Bank of England forecasts inflation will hover around zero for the next few months, with the potential for again turning negative as it did briefly earlier this year.
This reduces the need to hike interest rates now to keep inflation from overshooting its 2% target, although one member of the Monetary Policy Committee, Ian McCafferty, voted to increase rates by 0.25% to 0.75%.
Today's report could dampen expectations that a rate hike could come as soon as the end of this year.
A deluge of information will be released by the Bank of England at midday today that is likely to provide an insight into when interest rates will rise.
Dubbed "Super Thursday", the Bank will publish its interest rate decision, the minutes of the Monetary Policy Committee, which decides the rate, and its quarterly Inflation Report, the latest view on the state of the UK economy.
Mark Carney, the Governor of the Bank of England, will also hold a news conference to provide further details.
Previously the announcements have been spread out over a couple of weeks, but they are being combined in a bid to improve transparency.
Interest rates have been frozen at 0.5% since 2009 and, although the Bank is not expected to announce a rise today, a hike has been widely predicted for this winter.
Senior bankers have greeted Mark Carney's tough new proposals to crack down on fraudulent practices.
Anthony Browne, chief executive of the British Bankers' Association, said: "It's vital that London once again sets the gold standard for fair dealing and integrity in financial markets.
"We welcome the intention to extend regulation from banks to other types of trading organisations. This should give customers greater clarity and protection."
Martin Wheatley, chief executive of the Financial Conduct Authority, added: "These markets are central to our economy and today's recommendations will be important in rebuilding public trust in their integrity."
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