Bank of England’s Mann: ‘Squeeze out’ inflation with rate holds
Inflation is likely to become “persistently elevated” unless it is squeezed out with a more restrictive monetary policy than the Bank of England is currently predicting, a top Bank of England official has warned.
In a hawkish speech delivered on Tuesday, Monetary Policy Committee member Catherine Mann said the spectre of further price rises looked “greater than the judgement incorporated in the baseline forecast” produced by the UK’s central bank in May.
“A more persistent hold on Bank Rate is appropriate right now, to maintain the tight – but not tighter – monetary policy stance needed to lean against inflation persistence persisting,” she said at a panel event on the future of central banking in Mexico.
The external MPC member, whose ‘activist’ approach to monetary policy has earned her a reputation as one of the Bank’s most enigmatic rate-setters, also warned that heading to calls for faster rate cuts now risked greater price rises in the future and set off a round of secondary effects.
“By squeezing out inflation today, you prevent it from persisting in the future,” she said. “If this policy is not followed, even tighter policy would be required later to remove the resulting higher inflation and rein in the expectations drift.”
Mann’s comments follow a string of recent data suggesting the UK economy could be entering into another bout of inflation, led predominantly by sudden jumps in food inflation.
On Tuesday, the British Retail Consortium said that a “significant” jump in the cost of staples like eggs and butter had driven food inflation to hit 4.2 per cent in August. The industry body’s forecasts show food inflation is likely to hit six per cent before the end of the year, as fears of another winter cost of living squeeze weighs on consumer sentiment.
Mann cited research showing consumer inflation expectations to be especially sensitive to food and shop price rises, meaning there is a greater risk of second-round effects via more upward pressure on wages in the future.
“The projected inflation hump is higher than in our forecast in May, and together with elevated food prices and inflation expectations, increases the risk of attention threshold effects,” she said, referring to whether recent food price rises will lead to workers demanding pay rises when inflation peaked at over nine per cent.
The MPC’s more dovish members have been arguing that Bank officials should be more concerned about the UK’s flat-lining economic growth than the likelihood of inflation remaining above target persistently. Mann addressed the “increasing tension” faced by the MPC, saying it made “the monetary policymaker’s job harder in both decision-making and communication”.
But she said until there was more evidence that the UK’s slowing economy was sparking a “downside risk to demand” from consumers and businesses, it was “not [her] central case”.
She added: “However, I stand ready for a forceful policy action, in the form of larger, more rapid Bank Rate cuts, should the downside risks to domestic demand start materialising.”