Central banks need to be 'courageous' and hike interest rates

A former member of the Bank of England's Monetary Policy Committee, a BoE panel which determines the setting of rates, is back to telling everyone that Britain should raise interest rates right now.

Andrew Sentance told the BBC radio's Today Programme this morning that he thinks it's important to start gradually hiking rates again otherwise it will damage economic growth.

He has already said this a few times before and wrongly predicted that back in August"two or three members of the committee" would vote for a rate hike. Only one person voted for a rise in rates. This week, the BoE chose to keep UK interest rates at a record low of 0.5%.

"We have independent central banks because they are meant to be courageous, they are meant to try and get ahead of the curve, they are meant to do things that politicians might find difficult and they don't seem to behaving in that way at the moment," said Sentance this morning.

"You have to start raising them [interest rates] before the red lights start flashing."

He added that now more than ever, Britain needs to start gradually raising rates because of the uncertainty caused by the US Federal Reserve also refusing to make a hike is " is not really very good for the economy."

Rates have stayed at 0.5% since March 2009. This has stimulated the economy because it lowers the cost of borrowing. In other words, it helps those in debt to make repayments and boosts the amount of money in people's pockets.

However, a number of economists have started to publicly call for a rise in rates soon.

In August, prominent Bank of England member Kristin Forbes warned that the central bank must hike rates soon or face damaging the progress Britain has made over the last few years.

"An increase in interest rates is generally believed to take somewhere from one to two years to have its maximum impact. Maintaining interest rates at the current low levels during an expansion risks creating distortions," she said.

"Therefore, interest rates will need to be increased well before inflation hits our 2% target. 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. But with inflation starting from about zero today, there is no need to act before we are confident that inflation is heading back toward 2% within about two years as expected."

The time when rates will rise is one big guessing game though as Bank of England governor Mark Carney revealed that the BoE is looking to raise interest rates "at the turn of this year." However, after much speculation, BoE's deputy governor Ben Broadbent revealed that the central bank will not pre-announce a date for a rise.