Bank of England policy maker Swati Dhingra cautioned against raising interest rates further, saying that doing so could damage an already weak UK economy.
(Bloomberg) — Bank of England policy maker Swati Dhingra cautioned against raising interest rates further, saying that doing so could damage an already weak UK economy.
The newest official on the central bank’s nine-member Monetary Policy Committee said it would be prudent to hold borrowing costs steady for now and noted there’s little evidence of an inflationary spiral.
“Overtightening poses a more material risk at this point, through potential negative impacts from increased borrowing costs and reduced supply capacity going forwards,” Dhingra said in remarks prepared for an event at the Resolution Foundation in London on Wednesday. “It risks unnecessarily denting output at a time when the economy is weak and deepening the pain for households when budgets are already squeezed.”
The speech intensifies the debate at the BOE over whether to pivot toward a pause in rate rises.
Dhingra’s view contrasts sharply with those of fellow BOE policy maker Catherine Mann and confirms her as as one of the most dovish officials at the BOE. However, the speech didn’t suggest she’s considering when it would be appropriate to cut rates as her colleague Silvana Tenreyro has indicated.
Markets are now leaning toward a further 100 basis points of hikes in the UK, pushing the BOE’s key lending rate to 5%. That followed hawkish comments from the US Federal Reserve and European Central Bank.
Fed Chairman Jerome Powell shook markets on Tuesday with hawkish remarks suggesting that the US central bank will move more aggressively to tackle inflation, diverging from recent comments from BOE Governor Andrew Bailey.
Dhingra pointed to a raft of factors that suggest that price pressures are rapidly easing in the UK and that further rate rises would amplify the economic damage.
“In my view, a prudent strategy would hold policy steady amidst growing signs external price pressures are easing, and be prepared to respond to developments in price evolution,” Dhingra said. “Given little evidence of further cost-push inflation, further tightening is a bigger risk to output and the medium-term inflation target.”
Dhingra said previous hikes have yet to “fully take hold” and pointed to evidence that suggests firms are struggling to fully pass on higher costs. Inflation expectations are cooling and surveys point to wage growth “flattening off,” she said.
Dhingra added that closely-watched indicators, including services and core inflation, are now less useful for detecting domestically-generated price pressures because their “imported content is substantial.”
She calculated that 7.1 percentage points of the current inflation rate is due to a jump in energy costs and other imports, while just 2.9 points is from domestically generated inflation, including wages and profits. The UK’s inflation rate has fallen from a peak of 11.1% in October to 10.1% currently.
“This is a huge terms of trade loss, something we have just not seen in the history of the MPC before,” Dhingra added. “This is an unprecedented terms of trade crisis. The nature of the economy has changed so much being able to extrapolate from the 1970s is really fraught with a lot of problems itself.”
–With assistance from Philip Aldrick.
(Updates with comments from the speech.)
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