The Bank of England’s Catherine Mann has called for interest rates to be held where they are for longer before making a larger cut to revive the sluggish growth outlook, citing a recent spike in consumer inflation expectations as evidence price rises were embedding into the economy.
The external Monetary Policy Committee (MPC) member known for her ‘activist’ approach to monetary policy told a Bloomberg event that a rise in households’ inflation outlook driven by food price jumps could set off further rises that must be squeezed out by keeping Bank Rate at four per cent.
“I prefer a longer hold… and make a bigger cut when you do to make it very clear that this is not in response to the financial markets or other things,” she said. “This is really about the UK economy.”
Recent jumps in regulated sectors like energy and water have combined with surging food inflation to trigger an upturn in the average household’s inflation expectations for the next year.
Bank of England rate-setters watch average consumers’ expectations on the price outlook closely, as they can often be a precursor to what are known as ‘second-round effects’ like wage hike demands that stoke more permanent inflation.
Long-term household inflation expectations have climbed to 3.8 per cent in the second half of this year, their highest level since 2019.
Splits deepening on Bank of England’s MPC
Mann’s comments stand in contrast to a view held by some other MPC members, who have argued that recent price shocks in food and energy will be transitory and should not overly slow the Bank’s current rate cutting cycle.
On Tuesday, deputy governor for financial stability Sarah Breeden argued there was little “evidence that the disinflation process is veering off-track”, in a speech in which she warned against waiting “to see the ‘whites of disinflation’s eyes’” before making the next cut.
Instead, the Bank of England’s Mann argued that only a faster-than-expected collapse in the employment and wage landscape would convince her to vote to loosen policy, in a growing sign of splits emerging over the rate path into next year.
Answering a question on what it would take for her to vote for a cut, the rate-setter said: “It really is a matter of a non-linear adjustment in the labour market. Right now we are taking some of the heat out of the labour market. So non-linear adjustment in the labour market or a significant change in the [way] firms talk to us about their demand conditions.”
Mann, who has been an external MPC member for four years, also used the interview to warn of the potential that ongoing political uncertainty in the US was likely to cause a degree of disruption to the UK economy.
“There are a number of different things going on,” she said. “There’s a little uncertainty, a little volatility, and how that’s going to cascade into the UK economy through financial markets is something we’ll be looking at very carefully over the course of the next six months.”