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Warning over low interest rate risk

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Bank of England policymaker Kristin Forbes has warned that keeping interest rates artificially low could damage the UK economy.

Forbes, a member of the central bank’s Monetary Policy Committee, said there was a gap between a rate increase taking place and it having an effect on the economy.

She wrote in the Telegraph that a rate change would take up to two years to have full effect, suggesting rates could rise sooner rather than later.

Bank of England governor Mark Carney had previously suggested that rates would only rise once inflation reached 2% but Forbes suggested an increase could happen ‘well before’ that point.

“An increase in interest rates is generally believed to take somewhere from one to two years to have its maximum impact,” she said.

At the last meeting of the Monetary Policy Committee members voted in favour of keeping rates at their current level of 0.5%.

Forbes said keeping rates artificially low could cause damage to the economy, which remains in a fragile state.

She added: “Waiting too long would risk undermining the recovery – especially if interest rates then need to be increased faster than the gradual path which we expect.”

Some have speculated that interest rates would rise at the start of 2016, but Forbes refused to be drawn on a specific date for a rate increase.

“Unfortunately it is not possible to predict the exact date when it will be appropriate to raise interest rates,” she said.

“The appropriate time will depend critically on when there is more evidence that inflation is heading towards target as forecast.”

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