Rates will need to rise faster to prevent sticky inflation, BoE official warns

Interest rates will need to rise faster to stop inflation from being “embedded” in the UK economy over the long-run, a top Bank of England official warned today.

Catherine Mann, a member of the Bank’s nine-strong rate setting committee, said “a robust policy move… reduces the risk that domestic inflation already embedded is further boosted by inflation imported via a Sterling depreciation”.

Mann voted for a 50 basis point increase at last week’s monetary policy committee meeting, but was outvoted by six other rate setters, including governor Andrew Bailey, who favoured a 25 basis point hike, taking them to 1.25 per cent.

The pound has tumbled against the dollar and to a lesser extent the euro, mainly driven by investors ditching sterling-denominated assets on concerns the UK may tip into a recession and uncertainty over the government’s plans to deal with the Northern Ireland protocol.

Higher rates stateside have also weighed on sterling.

This depreciation threatens stoking inflation. A weaker currency means a country has to pay more to import goods and services, but it can boost exports by making its products relatively cheaper.

The US Federal Reserve last week signed off a 75 basis point rate hike, the steepest jump since 1994, while the European Central Bank earlier this month confirmed it will lift borrowing costs at its next meeting in July, its first move for over a decade.

“If the Fed tightens at the currently expected pace, and the ECB musters an increase soon,” Mann said, it “could add to inflation particularly in the near term” through further currency weakening. 

New inflation figures published on Wednesday are forecast by analysts to jump 0.1 percentage points above an already 40-year to 9.1 per cent.

The Bank last week lifted its forecasted inflation peak to just over 11 per cent, driven by the energy watchdog bumping the cap on bills again in October.

Mann, a former chief economist at the Organisation for Economic Co-operation and Development and investment bank Citi, warned price pressures look much stickier than initially thought.

“To me, the incoming data on inflation show increasingly domestic embeddedness, persistence, and momentum,” she said.

Mann joined the MPC last September.