The risk that the UK will face stubborn inflation pressures is diminishing fast, according to a member of the Bank of England’s rate-setting body, suggesting interest rate cuts might soon be on the way.
Dave Ramsden, one of the nine Monetary Policy Committee (MPC) members, told an audience in Washington that he was now “more confident” that inflationary pressures were receding.
“I was one of eight members who voted to hold Bank Rate at 5.25 per cent,” he said. “Over the last few months, I have become more confident in the evidence that risks to persistence in domestic inflation pressures are receding”.
Ramsden normally votes with the majority on the MPC on and his speech will be taken as a sign that a growing number of policymakers are getting ready to cut interest rates soon.
The speech comes at the end of a busy week, in which both inflation and wage growth came in ahead of expectations. In response markets reduced the number of rate cuts they expect this year.
Although inflation exceeded economists’ expectations this week, only dropping to 3.2 per cent, Ramsden said price increases had fallen “broadly in line” with expectations. It is likely to fall close to the two per cent target in April.
Ramsden also noted that the labour market has “clearly continued to loosen,” pointing to a range official indicators and business surveys. This had contributed to the easing in wage growth.
Services inflation, currently hanging around six per cent, has been a major concern for the Bank of England due to its labour-intensive nature. The latest forecasts suggest services inflation will remain relatively sticky.
But Ramsden suggested that services inflation has been determined to a greater extent by the increase in energy prices, meaning it could fall more quickly than anticipated as the impact of the energy shock unwinds.
“While services inflation continues to be more homegrown, we should place more weight on the likelihood that a greater part of recent services inflation will dissipate more quickly,” he said.
“For me the balance of domestic risks to the outlook for UK inflation, relative to the February MPR forecasts, is now tilted to the downside, with a scenario where inflation stays close to the two per cent target over the whole forecast period at least as likely,” he said.