One of the senior policymakers at the Bank of England stated that it needs to cut back on interest rates as soon as possible since the previous rate increase is taking a toll on the economy and pulling back inflation.
A member of the central bank’s rate-setting monetary policy committee (MPC), Silvana Tenreyro, stated that after a sharp decline in global energy prices, there are signs that inflation will fall “well below” the central bank’s 2% target rate.
“I expect that the high current level of Bank rate will require an earlier and faster reversal to avoid a significant inflation undershoot,” she said in a speech to the Royal Economic Society’s annual conference in Glasgow on Tuesday.
For the 11th consecutive time, the Bank increased interest rates last month to 4.25%. At the next MPC’s meeting, many in the financial markets are expecting a further quarter-point rate increase, with a 50% chance of a further rate increase by August.
Separately on Tuesday, Huw Pill, another member of the rate-setting committee, stated that the central bank must still guard against the risk that inflationary pressures persist for longer than expected.
In contrast, the Bank’s chief economist, Tenreyro, stated that Threadneedle Street is unsure whether it has raised interest rates enough to control inflation. “On balance, the onus remains on ensuring enough monetary tightening is delivered to ‘see the job through’ and sustainably return inflation to target,” Pill stated.
He chose to vote with the majority of the nine-strong panel for the rate increase last month. Another external member of the MPC, Swati Dhingra, and Tenreyro voted to hold the interest rates at 4%.
On Tuesday, Tenreyro also stated that the global bottlenecks caused by the COVID pandemic have eased as the demand in the wholesale energy markets has started to open up, leading to a decrease in inflation.
On Monday, the price of petroleum increased after some of the world’s largest oil companies agreed to reduce supply. Although the prices of these products are significantly lower than they were during Russia’s invasion of Ukraine, the wholesale price of gas has returned to pre-invasion highs.
Tenreyro stated that the drop has been at a quicker pace compared to what the Bank’s predicted. “Oil and gas prices and futures have fallen sharply, while indices of global supply chain disruptions and shipping costs are back to pre-pandemic levels.”
She predicted that previous rate hikes would have a gradual impact this year and next as households and businesses who fixed their borrowing costs at low rates moved on to more expensive mortgages and loans.
“This is likely to drag demand well below its potential, loosening the labor market and pulling down on inflation. In the absence of further counterbalancing cost-push shocks, I judge inflation is likely to fall well below target.”
In the United Kingdom, inflation unexpectedly rose to 10.4% in February, reversing three months of gradual declines from a peak of 11.1% in October—the highest level since the early 1980s. The Bank of England’s official inflation target is 2%.
Some financial analysts predict that the chaos in the global banking system could further increase borrowing costs, which would eventually have a negative effect on the economy as the central bank successively increases rates. It comes as concerns about the stability of banks have raised their cost of doing business, which may be passed on to borrowers.
Tenreyro stated that the rate-setter could be forced to take steps if an increase in bank funding costs “persists in a way that affects the inflation outlook.” She further continued that “If so, the MPC will need to take into account the resulting extra tightening in credit conditions when choosing a Bank rate path.”
- Published By Team Timeswire