Bank of England policy maker Catherine Mann signaled she’s likely to support further interest-rate increases to combat inflation, warning that investors are pricing in an ever larger premium into UK assets to account for future price shocks.
(Bloomberg) — Bank of England policy maker Catherine Mann signaled she’s likely to support further interest-rate increases to combat inflation, warning that investors are pricing in an ever larger premium into UK assets to account for future price shocks.
Mann — who is the most hawkish member of the nine Monetary Policy Committee — called for officials to “err on the side of tightening further in order to prevent the risks of further inflation persistence from crystallizing.”
“Holding rates constant at the current level risks enabling further inflation persistence which will have to be unwound eventually with a worse trade-off,” Mann said in a text of a speech she’s due to give Monday evening in Canada.
The remarks clash with comments made by fellow rate-setters suggesting that the BOE is nearing an end to its quickest series of rate hikes in more than three decades. Bank of England Governor Andrew Bailey last week signaled that those increases might be near the top of the cycle, and Chief Economist Huw Pill speaking in Cape Town endorsed a “Table Mountain” strategy where rates remain high and steady for some time.
It sets up another contentious meeting at the BOE next week, with markets paring back bets on higher interest rates in recent weeks. Bailey and Pill have said there’s multiple paths to bring inflation back down to the 2% target, a suggestion that a wait-and-see policy may do less damage to the economy than further hikes.
Mann said there’s a growing risk that the expectations consumers and businesses have about inflation will break away from the BOE’s goal and boost the risk premium that investors demand for holding UK assets.
“I worry that there is an increasing inflation risk premium being priced into the UK’s macroeconomic prospects,” Mann said, pointing to data that the premium has risen to 0.9 of a percentage point now from 0.2 of a point in 2014.
While wages are rising at a record pace, other data suggest that price pressures, parts of the jobs market and the wider economy are beginning to weaken. Investors are now only fully pricing in one more hike from the BOE with doubts rising over whether rates will rise again from 5.25% at the September meeting.
Mann was one of two BOE rate-setters to back a bigger half-point increase in rates last month.
She warned in the speech text that policymakers need to expect a world where inflation is more likely to be volatile and interest rates are higher than they were.
Mann argued that overtightening policy and causing the economy to nosedive would be an easier mistake to rectify than failing to raise rates by enough to stamp out inflation. She “will not hesitate to cut rates” if inflation and activity cools quicker than she expected.
“To pause or to hold the policy rate lower for longer risks inflation becoming more deeply embedded, which would then require more tightening in total,” she said. “It’s a risky bet that inflation expectations are sufficiently well-anchored.”
–With assistance from Greg Ritchie.
(Updates with remark on risk premium in the first and then from sixth paragraph.)
More stories like this are available on bloomberg.com
©2023 Bloomberg L.P.