The Bank of England’s interest rate cut to 0.25% in August should be enough to prevent the economy from slipping into a recession, according to the most hawkish member of the central bank’s interest rate-setting committee.
Kristin Forbes said Britain had avoided the predicted economic shock following the vote to leave the European Union and should recover without the need for a cut in rates to nearer 0%.
“The economy is experiencing some chop, but no tsunami,” she said, adding: “The adverse winds could quickly pick up – and merit a stronger policy response. But recently they have shifted to a more favourable direction.”
Forbes, a member of the monetary policy since July 2014, is a professor at the Massachusetts Institute of Technology and considered an expert on financial crises. She backed a cut in interest rates in August from 0.5% to 0.25% after the economy appeared to stumble after the Brexit vote, but she refused to back a £60bn expansion of the bank’s quantitive easing programme and moves to buy riskier corporate bonds. At the time she said she was “particularly concerned about excessive stimulus at this stage”.
But the last MPC meeting earlier this month hinted that there could be another rate cut before the end of the year.
In a speech at Imperial College London on Thursday, she said: “Looking forward, I am not yet convinced that additional monetary easing will be necessary to support the economy. The behaviour of UK consumers and businesses, and evolution of prices, will be critically important in determining the appropriate action.”
She warned businesses and consumers to expect a period of volatility, making it difficult to determine how well the economy is performing.
Likening the UK to a fishing boat, she said: “The fishermen in the boat need to stay vigilant, and may already be a bit seasick from the chop they have already encountered, but if the current weather continues, they should be able to sail home without more aid.”
She said the post-Brexit vote recovery, while milder than expected, would need consumers to continue to be resilient and businesses to continue hiring workers.
Forbes said the economy could be blown off course if forecasts by the central bank go awry. She asked: “Will wages and domestic costs continue their gradual increase towards levels consistent with the 2% inflation target? How much and for how long will inflation be pushed up by the increase in import prices arising from sterling’s depreciation?
“And even if the UK manages modest growth and a restrained increase in domestic prices over the next few quarters, will there be any negative events originating abroad that present risks?”
• This article was amended on 23 September 2016. An earlier version said “rate rise” in the fifth paragraph, where “rate cut” was meant.
