Banking regulator warns further interest rate hikes needed to quell inflation

Leading policymaker Catherine Mann says there is a risk of inflation taking root if rate hikes are paused. Photo: Holly Adams/Bloomberg

Interest Rates must rise further to quell inflation, a senior Bank of England policymaker has warned, dealing a blow to mortgage borrowers' hopes that higher borrowing costs could soon ease.

< p>Catherine Mann, a member of the Monetary Policy Committee (MPC), said the Bank needed to prove «our commitment to doing whatever is necessary to achieve the 2% [inflation] target as soon as possible.»

Officials have already raised rates 14 times, from 0.1% in December 2021 to 5.25% today, but Ms Mann said further increases were needed to prevent inflation from being stuck at high levels.

She said, «Take a break.» or keeping the policy rate lower for a longer period of time, which could cause inflation to become more entrenched, which would then require even greater policy tightening overall.

“The longer inflation remains much higher target, the more difficult and costly it will be to ultimately achieve the inflation target.”

The comments come ahead of the Bank's latest rate-setting meeting next week. financial markets expect another increase to 5.5%.

The stubborn inflation of 1708

Ms Mann's comments indicate a rift within the MPC, with Governor Andrew Bailey, Sir John Cunliffe and the Bank's chief economist Hugh Pill recently suggesting rates may have peaked.

Last month Mr Pill warned that there is a risk of causing «unnecessary damage» to the economy if rates rise too high. He argued that rates should be kept high rather than continuing to rise until inflation was subdued.

Ms Mann acknowledged further rate hikes risked going too far and damaging the economy, but said it was less sensible. worse than doing too little and allowing inflation to continue to rage.

Speaking at an event in Canada, she said: “I would prefer to err on the side of over-tightening. But if I'm wrong and inflation slows faster and activity deteriorates more significantly, I won't hesitate to cut rates.»

Inflation has fallen from last year's peak of 11.1% in October 2022 to 6.8%. in July. Economists expect growth to pick up when August data is released next week, before the downward trend resumes.

Ms Mann warned that her analysis showed the Bank of England's headline forecast «looks quite optimistic for inflation,» aimed at those who believe the hard work has been done and inflation will return to target.

She said: «It's a risky bet that inflation expectations are firmly entrenched and we need to wait until the underlying inflation will decrease.”

“We need to prepare for a world in which inflation is likely to be volatile in the future and the neutral nominal rate is likely to be higher than in the past. While they may support the «3% inflation is close enough» claim, popular in some quarters, it cannot be our guideline.»

0308 Bank rate hits 5.25

Ms Mann, a hawk, was one of two MPC members to vote to increase the base rate by 0.5 percentage points last month.

But it was voted down by six members who wanted an increase to 5.25%. . One member, Swati Dhingra, wanted the MPC to keep rates at 5%.

Ms Mann spoke after the European Commission said the UK economy was performing better than expected.

“UK activity has held up better than previously expected, despite high energy prices and inflation,” the EC said in an update to its summer forecasts. However, he added that rising interest rates and «persistent inflationary pressures» are expected to keep economic growth in check in 2024.

In the same update, the EC downgraded its eurozone growth forecasts due to German weakness. .

Officials said the country would be the only major European country to contract in 2023. Europe's largest economy is now expected to contract by 0.4% this year, down from a slight rise of 0.2% previously.

Germany's economy is expected to grow 1.1% in 2024 compared with a forecast of 1.4% earlier this summer.

The commission warned that Germany was seeing only a “modest recovery” in energy prices. a shock that plunged its industrial base into crisis. He added that the latest research shows a «significant deterioration in conditions» in both Germany and France.

The European Commission now expects output across the bloc to rise by 0.8% this year, compared with with an earlier forecast. for growth of 1.1%.