Now another Bank policymaker hints at early rate hike

The prospect of an interest rate hike in the UK may be closer than markets realise, according to a Bank of England policymaker.

Martin Weale, who sits on the Bank's rate setting monetary policy committee (MPC), suggested that rates need to rise as British wages start to increase.

His article in Scotland on Sunday appeared just days before the US Federal Reserve decides whether to hike interest rates for the first time since 2006.

And it followed a suggestion on Friday by another MPC member, Kristin Forbes, that interest rates would probably rise sooner rather than later.

Weale said that a rate rise in the near future would give the Bank scope to cut if the UK economy runs into trouble later.

“With wage growth remaining firm, the tightening labour market means that inflation is likely to rise above target in two to three years' time

“Policy needs to be set with reference to this, rather than the current rate of inflation. As a result, it seems likely to me that the Bank Rate will need to rise relatively soon.”

Official figures out this week are expected to show that pay excluding bonuses is expanding at an annual rate of 2.9% per cent.

But other analysts have pointed to signs of an economic slowdown lately, especially in manufacturing, and damage from the crisis in China.

The Fed's decision on Thursday will also affect the outlook for interest rate rises in the UK.

Inflation currently stands at 0.1 per cent, far short of the Bank's 2% target, but some on the MPC fear that prices will be rising strongly within two years. 

Bank of England Governor Mark Carney has said the decision to raise rates would become clearer around the turn of the year.

Weale said that British workers have become a bit more productive recently, taking some of the inflationary heat out of pay growth, but it was too soon to say that was a permanent improvement.

He added that the path of interest rates would depend on the state of the economy which remained uncertain. "And it is possible that, if events turn out very differently, a path of gradual rate rises might have to be reversed somewhat.

"Any decision to vote to change Bank Rate will be made on the basis of the balance of risks, but with the comfort that, if subsequent developments mean that any increase needs to be reversed, that can be done."