Bank of England Monetary Policy Committee member Catherine L Mann said inflation could remain high into 2024, and warned more rate hikes are needed to prevent “the worst of both worlds” where tools to fight price rises become less powerful.
Speaking in front of think tank the Resolution Foundation, Mann - one of the nine economists who set UK interest rates - discussed the different ways in whIch interest rates can filter through to the economy.
She said that a key factor can be whether businesses look forward or backward when it comes to inflation. ‘Forward-looking firms’ are more likely to respond to changes in interest rates, while ‘backward-looking firms’ will respond to past inflation.
Mann said that - without further rate hikes - high inflation could persist into 2024. This continuing inflation, she said, could then lead to more firms taking a backwards-looking approach, and therefore make it even harder to bring prices down.
“The resulting long period of time above the 2% target could increase the degree of backward-lookingness, or catch-up behaviour, in the system,” she said. “Given that the risk of increasingly persistent inflation rises disproportionately with the share of backward-lookingness, I believe that more tightening is needed, and caution that a pivot is not imminent.”
She added that if interest rates don’t rise sufficiently, rates will instead be higher for longer.
“We have an inflation remit, and we will achieve it one way or another. Failing to do enough now risks the worst of both worlds... as monetary policy will have to stay tighter for longer to ensure that inflation returns sustainably back to the 2% target.”
