Inflation ‘plateau’ could keep interest rates higher, Bank hawk warns
Bank of England officials may avoid cutting interest rates as worries inflation will remain above three per cent over the coming months leave policymakers in an “uncomfortable place”, a Monetary Policy Committee member has warned.
Speaking at an event hosted by the National Institute of Economic and Social Research, external member Megan Greene said the double-sided risks of lower growth and higher inflation were making decisions by rate-setters more complicated while volatile monthly data did little to ease concerns that price growth was falling.
Greene, considered to be one of the most hawkish members of the MPC, said the Bank’s focus should continue to be on “price stability” and hitting its two per cent inflation target.
The latest data published by the Office for National Statistics (ONS) showed year-on-year inflation hit 3.4 per cent in April and May, putting interest rate cuts at risk given the Bank has emphasised monetary policy was not on a “pre-set path”.
The bank’s central forecast said inflation could reach as high as 3.7 per cent in September.
“I worry about the near-term profile for inflation this year, which in my view now resembles more of a ‘plateau’ than a ‘hump’,” Greene said.
“We expect inflation to resume its fall towards our target from early next year. However, there is a risk that elevated inflation of roughly 3.5 per cent for the rest of this year will feed through into inflation expectations, and therefore wage and price setting behaviour.”
Greene also said recent figures suggested high inflation would influence the views of business owners and households, putting the UK at risk of suffering from “second round effects” where price growth may be amplified by individuals’ behaviour.
“This is even more of a concern in light of the escalating conflict in the Middle East, which poses upside risks to oil prices,” Greene said.
Recent jobs market data showing a collapse in vacancies and a pick-up in the unemployment rate was “roughly in line” with central forecast expectations.
But the American economist suggested Bank rate-setters had placed “more weight” on independent estimates over those published by the Office for National Statistics (ONS) given the issues it has faced in gathering respondents.
It has shown more “stagnation in hiring rather than contraction”, Greene revealed, suggesting the cause for interest rate cuts was weaker.
Interest rate cuts affected by Trump
Greene added policymakers would be closely following developments over the progress of President Trump’s “big, beautiful bill”, which analysts believe could lead to a spike in US debt, and the risk of universal ten per cent tariffs on goods imports to the US coming into effect before the next meeting in August.
“It’s unlikely that the uncertainty from these events, and subsequent developments, will be resolved any time soon. I therefore think a careful and gradual approach to removing monetary policy restrictiveness continues to be warranted.”
Greene’s comments came as she defended the Bank’s quantitative tightening (QT) programme and said it could continue “without the risk of losing monetary control”.
Governor Andrew Bailey yesterday responded to Reform UK deputy leader Richard Tice with his own defence of the Bank’s quantitative tightening programme after Tice accused officials of depleting the Treasury of funds by paying interest to commercial lenders.
In his letter, Bailey said quantitative easing policies followed after the financial crash and the pandemic helped to protect jobs and tax revenues.