A senior Bank of England policymaker has warned the central bank could be forced to keep raising interest rates to prevent high levels of inflation from becoming entrenched in the economy.
Catherine Mann, an independent economist on the Bank’s rate-setting monetary policy committee (MPC) said there were “material upside risks” to inflation sticking at higher levels 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 suffers not only from the Covid and energy shocks, but also the negative supply shock – the ‘worst of all worlds’.”
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Mann, consistently the most hawkish member of the MPC, was outvoted by her colleagues last week as she pushed for a bigger rate increase than the 0.5 percentage point rise 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 required. “We need to stay the course, and in my view the next step in Bank rate is still 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, after a modest fall in the headline inflation rate and as the economy teeters on the brink of recession. Financial markets expect one more 0.25 percentage point increase this year before Britain’s worsening economic slowdown forces the Bank to cut rates.
Inflation has fallen back from more than 11% in October to 10.5% in December, with most economists forecasting a rapid decline this year as the initial surge in energy prices after the Russian invasion fades in significance for the annual inflation rate.
However, Mann said there were risks inflation had so far stabilised at high levels, which “is not yet the harbinger of a turning point towards a sustainable return to the 2% target” set by the government for the Bank to achieve.
In addition to the Covid pandemic and the energy shock, she said Brexit was also affecting the British economy. “The UK has also been affected by a third type of shock which makes it unique: no other country chose to unilaterally impose trade barriers on its closest trading partners,” she said.
Mann said the risk of inflation remaining higher for longer should force the Bank to err on the side of caution by responding with further rate increases.
“The costs of making a mistake if the true inflation process is more persistent are larger than if the true inflation process is less persistent,” she said.
“A tighten-stop-tighten-loosen policy boogie looks too much like fine-tuning to be good monetary policy. It is both hard to communicate and to transmit through markets to the real economy.”