The Bank of England should increase interest rates early next year to help contain potential price pressures, according to the Organisation for Economic Co-operation and Development.
The comments come after the BOE cut its growth and inflation projections last week and signaled the U.K. may need record-low interest rates for a while longer as China drags on the world economy. While consumer prices fell 0.1 percent in September, inflation should pick up 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 OECD said in a report on Monday. “Higher interest rates should encourage greater economic restructuring thereby supporting productivity, which stronger infrastructure investment would further boost.”
There was also a warning about the property market and the potential for an increase in consumer debt. Data last week showed home values rose 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.
It said that the government’s planned increase in the minimum wage next year could push up unemployment. “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.