Interest rate rises should not be delayed by falling inflation because the improving jobs market suggests there is little room for the economy to grow without pushing up prices, according to the Bank of England’s most hawkish rate setter.
Martin Weale, an external member of the Monetary Policy Committee, said that while inflation, which fell to 1.2pc in September, from 1.5pc in August, had been “significantly depressed” by the strength of the pound and falling commodity costs, these were likely to be temporary factors.
He said “all logic” pointed to greater inflationary pressures in the coming months amid faster pay growth, which would push up prices over the next two to three years.
“The margin of spare capacity is shrinking rapidly and all logic suggests that ought to lead to an increase in inflationary pressures over the two to three year horizon which concerns the Committee,” he said in a speech on Wednesday. “An increase in Bank Rate of 0.25 [percentage points] would be unlikely to slow that process to a halt immediately but there is a risk that, if the increase were delayed, inflation would be pushed above target or a rather sharper increase in Bank Rate would be needed subsequently.”
Unemployment fell to 6pc in the three months to August, official data showed on Wednesday, from 6.5pc between March and May.