Britain is “now at full employment” and so can expect “a couple more small interest rate rises” in the next two to three years to stop the economy from overheating, according to Bank of England policymaker Ian McCafferty.
Higher interest rates will also give the Bank room to cut them once more if the economy hits a troubled spell in the years ahead.
“We would like to get to a point where interest rates could be materially cut if the economy weakens, as well as pushing them up as the economy has hit full employment,” Mr McCafferty told LBC, five days after he and the rest of the nine-strong Monetary Policy Committee voted to raise interest rates from 0.5pc to 0.75pc.
“What we are trying to do is to make sure the economy is stable, keep the economy growing at a pace which delivers a good employment and unemployment outlook without allowing inflation to rise.”
Unemployment is now down to 4.2pc, which is below the level at which the Bank believes wage pressures and inflation will start to rise.
As a result officials want higher interest rates which should rein in inflation.
The policymaker, who steps down from his role at the Bank at the end of this month after six years on the MPC, is considered to be among the most ‘hawkish’ officials as he regularly voted for rate rises even when most of the committee wanted to hold rates.
But even he expects rates to go up only very slowly.
“We’re only talking over the next couple of years of possibly a couple more small interest rate rises over that period,” he said.
“That’s what the markets are expecting and I think that’s a reasonable rule of thumb if the economy performs as we expect.”
Although the economy is now strong enough to cope with higher interest rates, he cautioned that the news is not all positive.
Mr McCafferty said uncertainty around the Brexit negotiations has caused an “exodus” of European bankers leaving London, with an effect on house prices in the areas favoured by expats in the capital.
“In London we have seen a significant change as result of uncertainty on Brexit,” he said.
“Among the number of those renting, who work in the City, usually from elsewhere in Europe, we have seen an exodus.”