A fertile climate for non-bank, alternative lenders that are providing an ever-increasing supply of finance to businesses could justify raising the UK interest rate earlier than the Bank of England (BoE) currently wants to. That is the view of economist Ian McCafferty, a prominent member of the BoE’s Monetary Policy Committee (MPC).
In a speech at the London headquarters of media group Bloomberg, McCafferty pointed out that the UK is in the “early stages of some important changes to the architecture of business finance”.
“Anecdotally,” he said, “it does appear that many SMEs are reluctant to rely on banks as much as before the [financial] crisis, suggesting that the emergence of alternative sources of SME funding in recent years may well prove a lasting development.”
Meanwhile, he added, larger firms “are currently facing very favourable financing conditions – at least on a par with those that prevailed before the crisis”.
McCafferty has emerged as a sole dissenter in MPC interest-rise votes on two separate occasions: once in the autumn of 2014, and again this autumn.
He explained: “My primary reason for having voted for a rate increase since August is based on my reading of the outlook, and of the balance of risks around inflation by 2017. Since [the turn of the year], the economy has continued to grow relatively strongly – we have continued to absorb [a] relatively small amount of slack.
“We now expect – on the basis of our August forecast from this year – that we will have absorbed all the remaining slack in the labour market by the course of spring or summer of next year.
“As a result, I think that once the pressures from low inflation, due to the sharp fall in oil and commodity prices, start to come out of the equation – which they will start to do so by next spring – then I think we’re going to see inflation rise again. If anything, my view of the balances of risk around inflation by 2017 are above our 2% target.”
McCafferty warned the BoE against overextending its delay on a rise.
He said: “If we on the MPC are to achieve our ambition of raising rates only gradually – so as to minimise the disruption to households and businesses of a normalisation of policy after a long period in which interest rates have been at historic lows – we need to avoid getting ‘behind the curve’, with respect to the neutral rate.
“For me, that provides an additional justification not to leave the start date for lift off too late.”