The Bank of England has said that households’ fears of high inflation levels could be tempered by keeping interest rates for longer.
In an event hosted by the think tank Resolution Foundation, Mann doubled down on her calls for the Bank to squeeze out inflation pressures in order to ease household nerves of higher prices and allow Brits to spend more again.
Her speech considered the reasons why the savings rate remained higher in the UK despite higher wage growth in the last year, blaming the energy price shock after Russia’s full-scale invasion of Ukraine for pushing people to leave themselves with a bigger savings buffer and creating a “consumption gap”.
“Even as inflation has returned closer to our two per cent target since its peak, we should remind ourselves of the fact that the cumulative increase in the price level does not just ‘wash out’ of the consumer psyche when inflation returns to target,” Mann said.
“High inflation itself is behind scarring, income uncertainty, and weak consumption growth. Therefore, monetary policy needs to continue to focus on reducing inflation to achieve the environment of price stability.
“Then, households can return to their normal consumption-savings behaviour which is conducive to stronger consumer demand.”
Consumer price index (CPI ) inflation hit a peak of 11.1 per cent in October 2022 before falling back to two per cent in May 2024 before the election last year.
It currently stands at 3.8 per cent, with economist forecasts claiming it could rise further to four per cent in the September reading.
Mann: Interest rates can help ease fears
Mann indicated these behavioural trends in the UK economy meant the Bank should keep interest rates higher for longer.
“If the consumption gap was my only concern, reducing the restrictiveness of monetary policy would be appropriate. However, in light of elevated inflation and expectations, maintaining restrictiveness for longer would be appropriate.”
She also indicated that tax fears around the upcoming Budget were likely to add to people’s savings buffer, widening the consumption gap and dragging UK growth.
Mann, who has described herself as an “activist” rate-setter and voted against Monetary Policy Committee (MPC) consensus on several occasions, could yet sway her colleagues ahead of a decisive meeting in November that could indicate whether the Bank stick with signalling a “downward” path to interest rates.
But the likes of Alan Taylor, the MPC’s most dovish member, has previously suggested worries about inflation expectations were overstated and that cracks in the jobs market were of greater concern.