Bank of England may be forced to raise interest rates again, politician says | Interest rate
A senior Bank of England politician has warned that the central bank may be forced to keep raising interest rates to prevent high levels of inflation from taking root in the economy.
Catherine Mann, an independent economist with the Bank’s monetary policy rate-setting committee (MPC), said there were “significant upside risks” to inflation remaining at levels higher than expected as the impact of the Covid pandemic, Russia’s war in Ukraine and Brexit weigh on the economy.
In a speech in Budapest on Monday, she said: “The UK is suffering not only from Covid and energy shocks, but also from the negative supply shock – the ‘worst of all worlds’.”
Mann, still the most hawkish member of the MPC, was outvoted by her colleagues last week as she pushed for a rate hike bigger than the 0.5 percentage point hike announced by the central bank. .
With the Bank’s base rate now at 4%, the highest level since 2008, she said further increases would still be needed. “We need to stay the course, and in my view the next step in the Bank Rate is even more likely to be another hike than a cut or hold,” Mann said.
Mann’s speech comes amid City speculation that Threadneedle Street is nearing the peak of its most aggressive tightening cycle in decades, following a modest drop in the headline inflation rate and as the economy teeters on the brink of the recession. Financial markets are expecting another 0.25 percentage point increase this year before the worsening UK economic slowdown forces the Bank to cut rates.
Inflation fell from over 11% in October to 10.5% in December, with most economists forecasting a rapid decline this year as the initial spike in energy prices after the Russian invasion lost significance for the annual inflation rate.
However, Mann said there were risks that inflation had so far stabilized at elevated levels, which “is not yet a harbinger of a turn towards a sustained return to the 2% target set by the government at the Bank.
As well as the Covid pandemic and the energy shock, she said Brexit was also affecting the UK economy. “The UK has also been hit by a third type of shock that makes it unique: no other country has chosen to unilaterally impose trade barriers on its closest trading partners,” she said.
Mann said the risk of inflation staying higher for longer should force the bank to err on the side of caution by responding with further rate hikes.
“The costs of an error if the true inflation process is more persistent are greater than if the true inflation process is less persistent,” she said.
“A tighten-stop-tighten-easing policy boogie sounds too much like fine-tuning to be good monetary policy. It is both difficult to communicate and transmit through markets to the real economy.