OECD: Bank of England should hike rates in early 2016

OECD: Bank of England should hike rates in early 2016

9 November 2015, 13:03
Angeliqi N

The Bank of England should increase borrowing costs as early as next year to help restrain possible price pressures, says the Organisation for Economic Co-operation and Development.

The remarks follow the BOE's decision last week to cut its growth and inflation projections. The bank also signaled last week the U.K. may need record-low interest rates for a while longer as China is a drag for the global economy.

While consumer prices dipped 0.1 percent in September, inflation should gain momentum in 2016 and 2017 toward the BOE’s 2 percent target, the OECD said.

"Spare capacity is low and a gradual normalization in interest rates, with the first hike in early 2016, would be prudent to contain excess demand pressures that now seem to be developing," the Paris-based thinktank said in a report on Monday.

An interest rates increase should inspire greater economic restructuring thus supporting productivity, which would be further boosted by stronger infrastructure investment, the body said.

The thinktank also issued a warning about the property market and the potential for a rise in consumer debt. Data last week signaled home values climbed an annual 10 percent in October, more than three times the pace of wage growth.

"House-price buoyancy could restrict access to the rental market, reducing labor mobility, and boost household indebtedness, creating financial stability risks," the OECD said.

Unemployment could be pressed higher by the government planned increase in the minimum wage next year.

“Past structural reforms have put the structural unemployment rate on a downward trend, although the recent decision to lift the minimum wage could work in the opposite direction,” it said.

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