A senior Bank of England policymaker has said interest rates should be held at 4% amid signs of cooling inflation, rather than adding to pressure on households and businesses with a further rise in borrowing costs.
Swati Dhingra, an external member of the Bank’s rate-setting monetary policy committee (MPC), said higher borrowing costs would pose a “material risk” to the UK economy.
“It risks unnecessarily denting output at a time when the economy is weak and deepening the pain for households when budgets are already squeezed through energy and housing costs,” she said in a speech to the Resolution Foundation thinktank in London.
“In my view, a prudent strategy would hold policy steady amidst growing signs external price pressures are easing, and be prepared to respond to developments in price evolution. This would avoid over-tightening and return the economy sustainably to our 2% inflation target in the medium term.”
Her intervention comes amid expectations in the City of London that the Bank will raise rates at its next meeting on 23 March. Financial markets have fully priced in a 0.25 percentage point increase to 4.25%, with some investors betting on a bigger 0.5 percentage point rise.
Financial markets have shifted to take account of the prospect of the US Federal Reserve raising borrowing costs higher than previously expected, after the American central bank’s chair, Jerome Powell, said there was still “a long way to go” to tame inflation in the world’s largest economy.
Threadneedle Street has raised rates 10 times in succession since December 2021 in response to the UK’s annual inflation rate soaring to more than five times its target of 2%. However, economists caution that the impact from higher rates will take time to feed through because many households and businesses fix their borrowing costs.
Forecasters expect inflation to cool rapidly this year as global energy prices fall back from historic levels. Inflation has eased from a peak of 11.1% in October to 10.1% last month, although this rate still remains among the highest levels since 1982.
Dhingra said there was little sign that higher prices for energy and imported goods were becoming embedded in wages and margins, meaning limited prospects for UK inflation remaining persistently high.
“Even after a year and a half of above-target inflation, there is little evidence for such cost-push inflation beyond what might be expected following an unprecedented terms of trade shock,” she said.
In comments echoing a warning she made in the Observer in December, she added: “Consumption remains weak and many of the tightening effects of monetary policy are yet to fully take hold.”
Her view, however, stands in sharp contrast with Catherine Mann, another external member of the MPC, who said on Tuesday that higher rates would be required to bring down inflation.
Mann said she was concerned about the ability of companies to exploit consumer willingness to tolerate higher prices, which could in turn drive up inflation – a phenomenon widely known as “greedflation”.
It comes amid signs that Britain’s economy has performed more strongly than expected in recent months, after narrowly avoiding a technical recession at the end of last year.
However, Dhingra’s position is close to Silvana Tenreyro, another external member of the nine-strong MPC, who said last month that rates may need to be cut this year as pressure on households and businesses from high borrowing costs ripple through the economy.