Bank of England policymaker Catherine Mann said more interest-rate rises are needed to clamp down on inflation as she dismissed talk of a looming “pivot” to easier monetary policy.
(Bloomberg) — Bank of England policymaker Catherine Mann said more interest-rate rises are needed to clamp down on inflation as she dismissed talk of a looming “pivot” to easier monetary policy.
The current elevated level of consumer-price growth, which remains around a four-decade high of 10.1%, could seep into wage and price setting and result in “an extended persistence of inflation into this year and next.”
Speaking at the Resolution Foundation in London on Thursday, Mann warned that the UK risks “the worst of both worlds” — a combination of high prices and low growth.
“I believe that more tightening is needed, and caution that a pivot is not imminent,” she said. Failing to do enough now would mean “monetary policy will have to stay tighter for longer to ensure that inflation returns sustainably back to the 2% target.”
Since December 2021, the BOE has raised rates from 0.1% to 4%, the fastest tightening cycle since the late 1980s. Markets expect further hikes to 4.5% and current pricing suggests there is a chance they go even higher.
Mann, who has consistently been the most hawkish member of the nine-member Monetary Policy Committee, set out new “state-of-the-art evidence” showing that transmission is faster than the standard 18-24 month theory due to the forward-looking nature of markets.
At the same time, she found that policy effectiveness can be “greatly diminished” by the backward-looking nature of firm behaviour.
Businesses are more likely to try to “catch up” with inflation by raising prices the longer it remains elevated. “Inflation becomes persistent because firms that set prices and generate inflation expect it to be persistent,” she said.
The series of inflationary shocks that have hit the global economy “have increased the risk” of creating more backward-looking businesses. Meanwhile, markets have begun to loosen financial conditions in anticipation of an inflection in the tightening cycle, which is absorbing some of the BOE’s rate hikes.
Mann warned against this “apparently premature loosening, given prospects for inflation formation.”
The “constellation” of easier market-based financial conditions and the desire among businesses to catch up with past cost growth “could yield extended persistence of inflation into this year and the next.”
“In my view, we have more to do,” she said. Monetary policy “has been historically aggressive, but perhaps insufficiently so relative to the multiple shocks.”
‘Inflation Problem’
“Further tightening and sooner rather than later likely is needed to ensure the effectiveness of monetary policy to achieve the objective of 2% sustainably in the medium term.”
Speaking in response to questions, Mann said the UK has a more difficult inflation problem than the US because so many people dropped out of the labor force in Britain since the pandemic.
“I don’t think we are in a restrictive stance particularly” on interest rates, she said. “It’s a very difficult challenge. We have an inflation problem — that’s the bottom line.”
–With assistance from Reed Landberg.
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