The Bank of England’s policy maker says interest rates could rise again in May

A senior politician from the Bank of England has said the Bank of England could raise interest rates again next month to combat the risk of high inflation continuing into 2023.

Catherine Mann, a former Citigroup economist who joined the BoE’s nine-man Monetary Policy Committee (MPC) last year, said on Thursday that rising energy and food prices will continue next year even if consumer demand weakens.

Some economists have predicted that the UK economy will shrink into the second quarter and possibly fall into recession following a collapse in consumer and business confidence in the wake of Russia’s invasion of Ukraine, which is likely to exacerbate commodity shortages and push inflation to new heights.

Mann said, however, that it was important for the central bank to dampen inflation expectations, which would likely push for higher wages and push inflation even higher.

“The domestic inflation ratchet … has been my central concern,” she said in a speech.

In February, when the MPC voted for a 0.25 point increase in the base rate, she voted with a minority for a sharper increase of 0.5 points. Last month, she voted with almost all other members for a 0.25 point increase, bringing the base rate to 0.75%.

She said: “Monetary policy must keep inflation expectations anchored; by doing so now, there will be a need for less austerity later, where demand may still be weak.”

The BoE will meet on May 5 to take a stand on interest rates at a time when most households have begun to absorb an increase in social security contributions and a freeze on income tax limits that will push hundreds of thousands of taxpayers into higher tax levels.

Inflation hit a 30-year high of 7% in March, and the BoE warned last month that the larger-than-expected rise in prices would push growth later this year.

But Mann said it was not obvious to her that this drop in consumer demand would come quickly enough to make companies curb future price increases.

“Tracking these price expectations and forecast revisions is crucial, as inflation is ultimately due to companies being systematically able to raise their prices,” she said.

In addition, incremental energy price increases designed to smooth out the recent shock increase in wholesale costs will prolong the period of high inflation. “The underlying inflation ratchet associated with delayed CPI [consumer price index] in companies’ pricing expectations will imply more persistence in keeping inflationary pressures above target, ”she said.

The financial markets expect Mann and the rest of MPC to raise the base rate to 2.25% by the end of the year. However, many economists expect the biggest collapse in real disposable household income since registrations began in 1948 to force a U-turn.

Samuel Tombs, chief economist in the UK at the consulting firm Pantheon Macroeconomics, said: “We doubt that MPC will be so cavalier in raising the bank interest rate to 2.25%.” He said an increase of 0.25 points in May and another in August would be what most UK borrowers could expect as the economic situation worsened.

Danny Blanchflower, a former MPC member and professor of economics at US Ivy League University Dartmouth College, said the BoE would be accused of squeezing household incomes in a time of rising poverty.

Mann’s concern that inflation would continue, driven by an explosion in wage demands, was based on “no evidence,” he added. “There is nothing in the study that shows that households or financial markets believe that inflation will last, and no evidence that workers have an influence on raising wages by more than inflation.

“All the evidence suggests that there is a recession around the corner driven by higher taxes, rising energy and food costs and a proof-free rise in interest rates.”

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