The Bank of England should start to raise interest rates next year to cool the economy as Britain’s booming jobs market leads to stronger wage growth and higher inflation, according to the Organisation for Economic Co-operation and Development (OECD).
The OECD expects Bank policymakers to raise interest rates from a record low of 0.5pc in “mid-2015”. It said tighter monetary policy would be a mark of success for the UK economy, which would support future pay growth through stronger productivity.
“Higher interest rates associated with the economic recovery could support stronger productivity growth by encouraging the selection of more profitable projects and the restructuring of loss-making companies,” the OECD said in its twice-yearly economic outlook.
While the Paris-based think-tank trimmed its forecast for UK growth to 2.7pc in 2015, from a projection of 2.8pc in September, the UK economy is expected to grow by 3pc in 2014 and secure its position as the fastest growing economy in the G7 this year. UK growth is expected to slow to 2.5pc in 2016.
The OECD’s assessment of the UK economy comes a week after Bank policymakers highlighted concerns that Britain’s strong jobs market could soon start pushing up inflation, even though price rises, as measured by the consumer prices index (CPI), are expected to dip below 1pc in the next six months.