"In my view, if the real economy remains solid and the pickup in the nominal data continues, this could soon suggest an increase in Bank Rate."
In a speech given yesterday, Forbes said she was "beginning to grow uncomfortable with the trade-off in our current forecast" between easing and tightening monetary policy. Explaining, she said that on one side, GDP growth is expected to slow whilst unemployment is expected to increase, creating a softening in the real economy which "might provide a basis to ease monetary policy".
On the other side, annual CPI inflation is expected to increase to 2.8% in the second quarter of 2018, and remain elevated so that it still averages 2.5% over 2019. A persistent overshoot of inflation above the 2% target might provide a basis to tighten monetary policy.
Forbes said "balancing these considerations is the “difficult situation” for monetary policy that the MPC warned might occur after a vote for the UK to leave the European Union".
However discussing the trade-off, Forbes believes that the forecasted sharp deterioration in unemployment and growth in the immediate aftermath of the Brexit vote has not transpired, and is "unlikely to start in the next couple of months".
In the most recent Inflation Report, the economy is only expected to moderate gradually and unemployment is expected to remain well below its pre-crisis average for all of the next three years.
Conversely, Forbes says data is now suggesting that inflation is accelerating more rapidly than expected and will overshoot the 2% target by more than in the MPC’s consensus forecast.
Forbes said: "If these trends in both the real and nominal data are solidified, it will become increasingly difficult for me to justify tolerating such a large and likely overshoot of inflation - especially when compared to such a small and uncertain softening in growth and unemployment."
She added that monetary policy "should not go on hold simply due to heightened uncertainty and volatility", stating that it may take many years for a new regime to be agreed on and a new equilibrium to be reached post-Brexit.
Forbes concluded: "As a result, I believe that the MPC should be nimble and willing to quickly adjust the appropriate path for monetary policy in either direction as needed throughout this period - even if it means reversing recent adjustments to Bank Rate.
"In my view, if the real economy remains solid and the pickup in the nominal data continues, this could soon suggest an increase in Bank Rate. It is worth highlighting that an increase in interest rates, however, given today’s extremely low level of Bank Rate, and the substantial amount of monetary stimulus that is already in place through a variety of programs, would still leave a substantial amount of monetary support for the economy."
