LONDON: The International Monetary Fund urged the Bank of England on Tuesday to avoid an “inaction bias” when it comes to raising interest rates, as it forecast UK inflation to peak in 30 years of about 5.5% next year.
The BoE said rates will need to rise to ensure that consumer price inflation – currently 4.2% – returns to its target of 2% over the next two years.
But the central bank refrained from a widely expected rate hike last month amid concern over the impact of the end of the government holiday program, and is expected to do so again on Thursday due to the spread of the Omicron coronavirus variant. The IMF, in an annual report on the UK economy, said the BoE faced tough compromises but it shouldn’t be too late.
“It would be important to avoid inaction bias, given the costs associated with controlling second-round impacts. Careful communication would be necessary to prepare the ground with the markets for potentially more frequent policy changes, ”he added.
A surge in global inflation due to rising energy prices and supply chain bottlenecks created by the COVID-19 pandemic has been exacerbated in Britain by Brexit barriers to the trade and migration.
When asked whether the BoE should have hiked rates in November, IMF Managing Director Kristalina Georgieva told reporters the central bank was “working with good judgment” and noted that there was a important meeting this week.