Economy ready for higher rates

On February 12, a member of the Bank of England’s Monetary Policy Committee said that rapid growth in the UK consumer debt compliments the case for higher interest rates. Former economist Gertjan Vlieghe for the hedge fund Brevan Howard believed that the increase of willingness of the consumers to borrow and spend means that the economy is ready for higher interest rates.

Mr. Vlieghe was once seen as the central bank’s “uber dove”, but first came out in favor of increasing interest rates last autumn. He argued that higher growth in borrowing showed low-interest rates, which provides more support to the economy than when households were saving. The MPC voted to increase interest rates for the first time in ten years last November, raising its benchmark by a quarter of a percentage point to 0.5 percent. Also, the MPC recommended last week that it would raise interest rates earlier and faster than expected to combat rising inflation in the past.

Moreover, he said on Monday “a bit more than” three rate hikes in the next three years would be necessary to get rid of excess demand in the economy. “It really depends on how the economy evolves,” Mr. Vlieghe said. These commentaries happened when he spoke at Resolution Foundation’s event run to mark the think tank’s recent report as it examines the role of debt in modern Britain, Financial Times reported.

Furthermore, Vlieghe pointed to steps the FPC had taken in 2014 and 2016 to constrain risky mortgage lending as examples of the kind of policies that could safeguard financial stability. The foundation’s record revealed two risky pre-crisis kinds of mortgage and it is currently virtual non-existent in the UK. In the end, mortgages’ proportion advanced without any verification of the borrower’s income. It dropped from 46 percent in 2007 to less than one percent in 2017.

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