Ben Broadbent, a deputy governor at the Bank of England, said today that it was “possible” that interest would be cut this summer, in line with market expectations.
“If things continue to evolve with its forecasts – forecasts that suggest policy will have to become less restrictive at some point – then it’s possible Bank Rate could be cut some time over the summer,” Broadbent said in a speech delivered at the Bank of England.
In his final speech as a rate-setter at the Bank, Broadbent said that policymakers were now dealing with the more “persistent, second-round effects” of the initial surge in inflation. “How long these persist is unclear,” he said.
The Bank judges that the unwinding of the inflationary shock is likely to be “asymmetric”, taking longer to unwind than it did to emerge.
Strong wage growth is one of the main reasons why inflationary pressures may take more time to unwind. Wage growth is not expected to converge to the Bank of England’s own wage equations for the rest of this year.
However, firms are reporting that they feel less able than last year to pass on higher costs to consumers, which would limit the inflationary impact of higher wages.
Real incomes have also recovered significantly this year, which could also mean that households do not feel the need to demand higher wages going forward.
“The more that’s regained, the less ground, relative to some notional ‘norm’, there is to make up,” he said.
Broadbent’s comments come ahead of April’s inflation figures, due out on Wednesday. The figures are expected to show that the headline rate of inflation fell back to two per cent thanks to lower energy prices, although most forecasters then expect a slight pick up in the second half of the year.
Following this week’s data, the Bank will receive another round of labour market and inflation data before June’s meeting.