UK economic growth and inflation are on course to outstrip previous Bank of England forecasts , according to a central bank policymaker.
Michael Saunders, a member of the bank’s nine-strong monetary policy committee (MPC), said inflation could hit 3% by the end of this year and has predicted gross domestic product (GDP) to expand by 2% through next year and 2018.
The bank had previously forecast the inflation to peak at 2.8% in the first half of next year and for GDP to grow by 1.6% in 2018.
In a speech to the Federation of Small Businesses in London, Mr Saunders said the stronger-than-expected growth would be driven by rising business investment and exports, helping to offset the slowdown in consumer spending.
He also flagged that there was room for a “modest rise” in interest rates while continuing to support the economy.
However, he said there was still more economic data to see before the MPC makes its interest rates decision in May.
He said: “My hunch is that in 2017-18, we will see higher near-term inflation, plus a greater rotation of growth away from consumer spending and towards investment and net trade, than the February IR base case.
“The upturns in exports and investment may keep the economy growing at around 2% year-on-year across 2017-18 combined, even as consumer spending slows .
“The lower neutral rate implies that, if the MPC were to lift rates at some stage, the tightening path probably would be limited and gradual.
“Moreover – and again, while not prejudging what I or the MPC might decide on monetary policy – a modest rise in rates would still imply that considerable stimulus remains in place, helping to support output and jobs.”
Mr Saunders’ comments come after last month’s meeting saw one policymaker vote for a hike in the first split decision since last July.
Eight MPC members voted to keep rates on hold, but mounting concern over surging inflation saw outgoing rate-setter Kristin Forbes vote for a rise to 0.5%.
Despite Ms Forbes’ dissent, the bank has been widely expected to keep rates on hold at the record low of 0.25% throughout this year, with many economists not pencilling in a hike until 2019.
Focussing on inflation, Mr Saunders said: “I want to stress that this prospective near-term inflation pickup does not imply that Brexit Britain will face persistently high inflation.
“Nor does it signal that the MPC has gone soft on our low inflation remit.”