A Bank of England rate-setter called for a “steady-as-she goes” approach to cutting interest rates, citing concerns about a potential pick-up in consumption and lingering cost pressures.
Megan Greene, one of the Monetary Policy Committee’s (MPC) more hawkish members, said a “gradual approach” to lowering borrowing costs was “appropriate” given the balance of risks facing the economy.
In its last set of forecasts, the Bank of England laid out three possible scenarios for the inflation outlook which were guiding its approach to monetary policy.
In the most benign case, the global shocks that drove up inflation in the first place continue to fade, bringing inflation back to target, while in the second “a period of economic slack” is required to secure inflation at two per cent.
In the final scenario, the UK economy has suffered “structural changes” that have permanently impacted wage and price setting, potentially keeping inflation higher for longer.
Megan Greene
Greene said she put most weight on the second case, the scenario which formed the central case for the Bank’s most recent forecasts.
“Indicators of inflationary persistence have broadly been moving in the right direction,” Greene said, pointing out that services inflation has been “grinding” downwards while wage growth has eased.
However, Greene said she put more weight on the third case than the first, cautioning that the descent in services inflation had been driven largely by falling catering prices.
Monthly annualised measures of services inflation, excluding indexed and volatile components, had remained between four and five per cent all year, she said.
Greene also suggested that domestic consumption could increase faster than expected, having remained unusually subdued since the pandemic.
“The risks to activity are to the upside, which could suggest that the long run neutral rate is higher and – all else equal – our stance of policy isn’t as restrictive as we had thought,” she said.
The Bank voted 8-1 to hold interest rates at five per cent last week, having cut for the first time since the pandemic in August.
Andrew Bailey, the Bank’s governor, said rates would only come down gradually over the months ahead. Markets have fully priced in one further rate cut this year, although a second is seen as more likely than not.