The Bank of England should raise interest rates more aggressively to shore up the weak pound, according to one of the central bank’s policymakers, who warned that sterling’s depreciation was fuelling inflation from higher import costs.
In a hard-hitting speech, Catherine Mann said the nine-strong monetary policy committee (MPC), which she joined last year, was in danger of falling behind rival central banks that were taking a more energetic approach to tackling inflationary pressures.
Mann, who voted for 0.5% increase in the Bank’s base rate at a meeting last week, said she was most concerned about the signal from the US Federal Reserve that it planned to raise rates several times after a 0.75% increase this month.
The former investment bank economist said the UK was vulnerable to financial flows that sought out countries with the highest interest rates. Funds could depart the UK for the US in search of of higher interest rates unless the Bank’s plans for higher rates kept pace.
“In my view, a more robust policy move ... reduces the risk that domestic inflation already embedded is further boosted by inflation imported via a sterling depreciation,” Mann said in a speech at an event organised by MNI Market News.
The Bank raised its benchmark interest rate by 0.25 percentage points to 1.25% last Thursday and said it was ready to act “forcefully” if needed to stamp out dangers posed by inflation. Mann and two other members of the MPC voted for a 0.50 percentage point rise.
In the past the Bank had taken a cautious approach to raising rates and resisted cutting them quickly when lower borrowing costs were needed to support he economy, she said.
The current crisis has demanded a more aggressive stance to raising rates and an acceptance by the MPC that interest rates will need to be cut rapidly when price pressures ease, maybe as soon as next year.
She said there were signs that the jump in inflation – which hit a 40-year high of 9% in April – was becoming more embedded and persistent, and had more momentum after government support measures for households.
“Even though higher energy and food prices clearly are hitting real incomes, countervailing factors importantly and increasingly are likely to support consumption spending in the near term.
“These include the two fiscal packages, strong employment, widespread bonuses as well as robust wage growth, strong housing values, accumulated savings, quality trade-down, and borrowing through credit cards among other schemes.
“All told, to the extent that consumption growth remains stronger than expected based on real income, this would support firms’ pricing expectations and decisions, and add to domestic upside risks to inflation.”
Rate increases by the Fed and the European Central Bank would lead to more downward pressure on sterling, which would add to inflation pressures, she said.
“I open the door to a policy rate reversal in the medium term when the domestic supports to demand fade and when weakness in external sources of demand bite,” she said.
