The UK’s Institute of Directors welcomed the US Federal Reserve’s decision to raise interest rates for the first time in almost a decade, and urged the Bank of England — the UK’s central bank — to follow suit and begin normalising rates in the UK.
The US Federal Open Market Committee (FOMC) unanimously voted to set a new target range for the federal funds rate at 0.25 percent to 0.5 percent, up from zero to 0.25 percent.
However, the Fed signaled that the pace of subsequent increases will be “gradual.”
“The committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run,” said the FOMC.
James Sproule, chief economist at the Institute of Directors said higher US interest rates gave the Bank of England the flexibility to start normalizing UK rates.
Sproule said that because the Fed had acted first, this reduced the possibility that an increase in UK rates would upset the value of the pound against the dollar.
“While inflation is clearly way off the bank’s 2% target, the Monetary Policy Committee must look past this temporary period of low inflation and act soon,” said Sproule.
“Interest rates still need to be normalised, not to tame rising prices but to take away monetary stimulus which has done its job to spur growth, is no longer needed and could be leading to capital misallocation.
“There will always be a thousand possible excuses not to raise rates, but we must take account of the exceptional circumstances in which we find ourselves. We are probably close to peak employment in the UK, with employment growth set to plateau next year.
“All these factors should encourage rate-setters in the UK to think seriously about raising rates in early 2016.”