Rate rise urged ‘sooner rather than later’

Britain needs to start raising interest rates sooner rather than later if it wants to avoid sharp and painful increases in the future, a member of the Bank of England's rate-setting committee has warned

In an interview with the Financial Times, Martin Weale, an external member of the BoE's Monetary Policy Committee, said he thought even a "gradual" rise in interest rates could see borrowing costs rise by up to one percentage point a year – faster than markets are expecting.

Read MoreUK interest rates to rise from early-2015: CBI

Chris Ratcliffe | Bloomberg | Getty Images

Mr Weale said his definition of a "gradual" rate rise would involve the bank tightening by "no more than" 25 basis points a quarter, while investors are betting on an increase of about 1.8 percentage points over three years.

The central bank has repeatedly said rate rises will be "gradual and limited" when the economy becomes strong enough to make them necessary. But Mr Weale warned that if the MPC wanted the pace to be gradual it should not wait too long before making a start.

Read MoreRising UK interest rates: Who should you listen to?

"If you want to have baby steps you do have to start sooner," he said in an interview with the Financial Times. "The question is: how close are we getting to 'soon'? Of course we can never be sure, but the economy . . . has sustained fairly rapid growth in demand."

"So I'm having to ask the question – and the answer is less definite than it was six months ago – 'where do I think the interest rate should be at the moment?'"

Economists think the BoE, which has kept interest rates at a record low of 0.5 per cent since 2009, could be the first leading central bank to increase rates since the European Central Bank tightened monetary policy in the summer of 2011.

Read MoreUK housing boom cools amid 'mortgage prison' fears

Mr Weale's views are particularly important because economists think he will be the first MPC member to vote for a hike.

He told the FT he thought "we can wait a bit longer. How long that 'bit longer' will be I'm not sure, but the best judgment I can have is that it's not so urgent it needs doing now."

He acknowledged the amount of untapped potential or "slack" in the economy – its room to grow before triggering a need for higher interest rates – had probably shrunk since March, when he estimated it was about 0.9 per cent of gross domestic product.

"I wouldn't say that 0.9 had gone down to 0.7 or 0.6 but I think it's fair to say there is less capacity than there was on the basis of the figures I looked at," he said. Earlier this month the MPC said the "central view" of most members was that slack amounted to between 1 and 1.5 per cent of GDP.

More from the FT:
London mortgage lending slows
BoE edges towards decision on rate rise
BoE's Bean expects 3% interest rate within 5 years

Investors were taken by surprise last week by minutes of the MPC's last meeting which said "some" of the nine members thought the decision to keep rates on hold was "becoming more balanced". Mr Weale confirmed to the FT that he was among that group.

"What I'm increasingly going to have to do as more capacity is used up is balance off my sense of the risk of waiting too long versus acting too soon," he said. "I very much can see risks both ways and "becoming more balanced" means an increasing sense of having to balance and judge those risks."

Read MoreMore than 50% of UK homes to be rented by 2032

Factors that could tip the balance for him would include evidence of more movement in wages or a faster fall in unemployment than the MPC forecast in its May inflation report, he said. Those pointed to the jobless rate – currently 6.8 per cent – falling to 6.3 per cent by the final quarter of this year and to 6 per cent by the third quarter of next year.

Follow us on Twitter: @CNBCWorld