Published: Wed, February 08, 2017
Economy | By Melissa Porter

BoE's Forbes: Rate Hike Now Would Still Leave Substantial Monetary Support

She said: 'If the real economy remains solid and the pick-up in the nominal data continues, this could soon suggest an increase in bank rate.

Bhattacharya highlighted that core inflation has proved to be sticky and that may worry the RBI."The average inflation observed is more than 4 percent and the central bank's first priority would be to contain that while watching other incoming indicators", he said.

Ms Forbes said she was sceptical that there was as much slack as the Bank's forecast implied.

Earlier in December, the RBI's Monetary Policy Committee (MPC), during its second bi-monthly monetary policy review - the fifth of the fiscal - kept the repurchase rate, or the short-term lending rate it charges on borrowings by commercial banks, unchanged at 6.25%.

As a result of the surge in bank deposits following the recent demonetisation of high-value currency, lending rates have fallen by up to 1%.

She added that the Bank's actions last August had provided a far bigger fillip than expected.

GDP growth has been stable at 0.6 per cent each quarter following the vote, Forbes points out, and shows few signs of slowing down.

Mr Carney controversially warned a Brexit vote could tip the United Kingdom into recession, but has since been forced to admit the Bank's forecasts were wide of the mark.

In its quarterly inflation report last Thursday, the Bank upped its growth forecast to 2 per cent this year, 1.6 per cent in 2018 and 1.7 per cent in 2019.

"If these trends in both the real and nominal data are solidified, it will become increasingly hard for me to justify tolerating such a large and likely overshoot of inflation - especially when compared to such a small and uncertain softening in growth and unemployment", says Forbes.

She said the UK's impressive performance since last June has made it hard to justify keeping rates at the record low of 0.25 per cent for much longer given inflation is predicted to surge close to 3 per cent next year.

While no respondent expected a cut higher than 25 basis points, there were at least five people who said that the central bank may choose to hold rates in the light of global uncertainties and sticky core inflation.

The Bank, which has now raised its growth outlook twice in the last three months, said last week around half of its latest upgrade was thanks to the government spending boost revealed in the Chancellor's Autumn Statement. The RBI may also want more time to gauge the impact of global headwinds on the rupee.

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