A Bank of England rate-setter said he would prefer to leave interest rates on hold a little while longer to ensure the post-pandemic surge in inflation has been decisively tamed.
“I would rather hold rates until there is more certainty that underlying inflationary pressures have subsided sustainably,” Jonathan Haskel said in a speech at the Economic Statistics Centre of Excellence.
Haskel argued that the economy was still feeling the shocks from the pandemic and the Russian invasion of Ukraine, warning this would keep inflation above the two per cent target for “quite some time”.
He also expressed concern that the labour market had not yet recovered from the impact of the pandemic. “The labour market continues to be tight, and I worry it is still impaired,” he said.
Haskel voted to leave interest rates on hold at the Bank of England’s last meeting in June. His comments today suggest he is not likely to opt for a cut in August.
This is the first time a member of the Monetary Policy Committee (MPC) has spoken since before the election was called, leaving investors guessing as to how rate-setters have interpreted the rounds of incoming data.
However, minutes from the Bank of England’s June meeting showed that the decision was “finely balanced” suggesting that an August rate cut is very much on the cards.
Although inflation has fallen to two per cent, indicators of underlying inflation – such as services inflation – have remained more persistent. The labour market also remains tight, with annual wage growth in the private sector running around six per cent.
This could push up the headline rate of inflation later in the year. The Bank forecasts that it will rise to around 2.6 per cent by the turn of the year, with inflation only returning to two per cent sustainably in early 2026.
Haskel said this uptick “reflects that underlying inflation is persistent and declining more slowly, with headline inflation pushed around by volatile energy and base effects.”
He also rejected accusations that the Bank was behind the curve on inflation, noting that the labour market was only pushing up on inflation from the final quarter of 2021, when the Bank started raising rates.
Haskel noted the Bank’s decision to hike rates came at a time of the Omicron variant, when the economy was on the cusp of another lockdown. “These are the actions of an institution ahead of the curve, not behind it,” he said.