BoE official warns it may be necessary to raise interest rates as early as 2014

The Bank of England warned that interest rates might rise as early as next year as its chief economist said Threadneedle Street’s desire to keep borrowing costs low for several years could be thwarted by a combination of stronger than expected growth and unusually weak productivity.

Spencer Dale, one of the nine members of the rate-setting monetary policy committee, said the UK was currently growing at an annual rate of 3-4% and the Bank could not be certain when it might need to tighten policy.

Following guidance issued by the Bank in August, the City is expecting interest rates to remain on hold at their record low of 0.5% until at least 2015. But Dale said in a Guardian interview that in certain circumstances an increase could happen as soon as 2014.

“What we are clear about is what the state of the economy will be like when we raise interest rates. What we are not as clear about is whether that is two years ahead, three years ahead, or one year ahead. But it is clear that we are thinking of years not months,” Dale said.

The Bank said in August that unless there was a risk from inflation or an over-heating property market it would only start thinking about raising interest when unemployment had come down to 7% from 7.7% currently, something it did not expect until 2016. But the recovery in the economy seen since the spring has left many in the City convinced that the Bank will be forced to take action before then.

Dale said that “forward guidance” had been useful in explaining how the Bank was likely to behave, and that he was “nervous that some people may be thinking we are going to raise rates just because we are going to have strong growth”.

“By doing that [forward guidance], we reduce the likelihood that people, when they see a few quarters of strong growth, expect us to raise rates. We have reduced the likelihood of a premature raising of rates.”