Bank of England ‘may need to cut interest rates
earlier and faster’
MPC member Silvana Tenreyro expects such a move ‘to
avoid significant inflation undershoot’
Richard
Partington Economics correspondent
@RJPartington
Tue 4 Apr
2023 13.15 BST
The Bank of
England may need to cut interest rates earlier and faster as the impact from
previous increases drags down the economy and pulls back inflation, one of its
senior policymakers has said.
Silvana
Tenreyro, a member of the central bank’s rate-setting monetary policy committee
(MPC), said there were signs inflation would fall “well below” the central
bank’s 2% target rate after a sharp decline in global energy prices.
In a speech
to the Royal Economic Society’s annual conference in Glasgow on Tuesday, she
said: “I expect that the high current level of Bank rate will require an
earlier and faster reversal, to avoid a significant inflation undershoot.”
The Bank
last month raised interest rates for an 11th consecutive time, to 4.25%.
Financial markets expect a further quarter-point rate increase at the MPC’s
next meeting in May, and are forecasting a more than 50% chance of a further
rise by August.
In separate
comments on Tuesday, another member of the rate-setting committee, Huw Pill,
said the central bank still needed to guard against the risk that inflationary
pressures persisted for longer than hoped.
In contrast
to Tenreyro, the Bank’s chief economist said Threadneedle Street could not be
sure it had raised interest rates enough to tame inflation. “On balance, the
onus remains on ensuring enough monetary tightening is delivered to ‘see the
job through’ and sustainably return inflation to target,” Pill said.
He voted
with the majority of the nine-strong panel for last month’s rate increase.
Tenreyro and Swati Dhingra, another external member of the MPC, voted to keep
rates on hold at 4%.
Tenreyro
also said on Tuesday that global supply chain bottlenecks triggered by the
Covid pandemic and a surge in wholesale energy markets were beginning to
unwind, leading to a sharp decline in inflation.
Oil prices
jumped on Monday after some of the world’s biggest producers agreed to cut
production. Prices are, however, still significantly lower than they were
immediately after the Russian invasion of Ukraine a year ago, while the amount
paid for gas on wholesale markets has fallen back from post-invasion highs.
Tenreyro
said the drop had been faster than the Bank anticipated. “Oil and gas prices
and futures have fallen sharply, while indices of global supply chain
disruptions and shipping costs are back to pre-pandemic levels.”
She said
previous rate increases would gradually have an impact over the course of this
year and next, as households and businesses who fixed their borrowing costs at
low rates moved on to more expensive mortgages and loans.
“This is
likely to drag demand well below its potential, loosening the labour market and
pulling down on inflation. In the absence of further counterbalancing cost-push
shocks, I judge inflation is likely to fall well below target.”
UK
inflation unexpectedly increased to 10.4% in February, reversing three months
of gradual declines from a peak of 11.1% in October – the highest level since
the early 1980s. The Bank’s official target for inflation is 2%.
Some
economists have predicted that turbulence in the global banking system could
further push up borrowing costs, serving as an additional drag on the economy
after successive central bank rate increases. It comes as fears over banks’
stability has pushed up their cost of doing business, which could be passed on
to borrowers.
Tenreyro
said that if the increases in bank funding costs “persist in a way that affects
the inflation outlook” then ratesetters could be forced to act. “If so, the MPC
will need to take into account the resulting extra tightening in credit
conditions when choosing a Bank rate path,” she said.
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