Cutting UK interest rates or keeping them at the current level could risk embedding high inflation into the economy, a Bank of England policymaker has warned.
Catherine Mann, who is a member of the Bank’s nine-person Monetary Policy Committee in charge of deciding interest rates, said she would rather “err on the side of over-tightening”.
“To pause or to hold the policy rate lower for longer risks inflation becoming more deeply embedded, which would then require more tightening in total, to both change inflation itself and to wring out the embedded inflation that comes from the sustained duration above target," Ms Mann told the Canadian Association for Business Economics.
“But if I am wrong, and inflation decelerates more quickly and activity deteriorates more significantly, I will not hesitate to cut rates."
The caution comes before the MPC is due to meet this month to decide whether or not to lift interest rates from the current rate of 5.25 per cent.
Some economists think rates will go up to 5.5 per cent as pressure remains on the bank to control inflation.
It means it would become more expensive to borrow, mainly affecting mortgage-holders whose fixed-rate deals have come to an end, or those wanting to take out a new loan to buy a home.
Ms Mann has regularly voted to increase interest rates higher than the level her MPC peers have opted for. Last month, she voted to raise the base rate to 5.5 per cent.
“That is because I believe that the MPR forecast, for a long time, has been telling a story fundamentally different from the one that I consider likely,” she said.
“My story has been one of more resilient domestic demand and more persistent price pressures, which therefore requires a more restrictive monetary policy stance.”
Inflation around the world - in pictures
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People queue to buy wheat flour at government-controlled prices in Islamabad. Pakistan's economy has been hit hard by a political crisis, as well as devastating floods and the global energy crisis, with the rupee plummeting and inflation at decades-high levels. AFP -
A market in Rio de Janeiro. Brazil's inflation ended 2022 with a sharp slowdown from double-digit peaks seen throughout the year. Reuters -
A market in Istanbul. Turkey's inflation at the end of 2022 stood at 64. 27 per cent, the country's Statistical Institute said, while the independent group of inflation researchers ENAG calculated it at 137. 55 per cent. EPA -
A Walmart in New Jersey. According to a poll, US Republicans and Democrats have distinct views of what’s most important for the government to address amid high inflation. More Republicans name gas and food prices, energy and immigration, while Democrats focus on health care, climate change and poverty. AP -
A used car sales lot in California. US Federal Reserve officials have indicated it’s possibly too early to declare victory over inflation. AFP -
A person walks by a sign showing interest rates at a bank in New York. EPA -
A woman walks with purchases past a store in Berlin. In December, consumer price growth across the Euro zone slowed to 9.2 per cent from 10.1 per cent a month earlier, Eurostat data showed last week. AP -
Workers sit in front of a banner reading "Stop the Inflation Monster" at the Burchardkai Container Terminal as they go on strike for higher wages at the harbour in Hamburg, Germany. Reuters -
Price tags at a market in Nice, France. Reuters -
Commuters cross Waterloo Bridge in London. The British Retail Consortium said spending in store chains rose by 6.9 per cent in annual terms in December, but this was a long way off consumer price inflation, which hit 10.7 per cent in November. Reuters -
Jobseekers in Johannesburg. South Africa’s governing party wants the central bank’s mandate broadened to shore up the economy and promote employment in addition to its existing task of tackling inflation. Reuters -
Social grant recipients stand in a queue outside a post office, as joblessness takes its toll in Meadowlands, South Africa. Reuters
Ms Mann said that holding interest rates at the current level could mean it takes longer to bring inflation down to the Bank’s 2 per cent target, meaning that prices will remain elevated.
The bank should not be guided by the belief that inflation reaching 3 per cent is “close enough” to target, a view becoming popular in some circles, she said.
UK Consumer Prices Index inflation fell to 6.8 per cent in July, down from 7.9 per cent in June, and is expected to drop sharply towards the end of the year.
