Catherine Mann says the Bank of England’s MPC is at risk of lagging behind rival central banks.
The Bank of England should hike interest rates more hawkishly to bolster the weak pound, according to one of the central bank’s policymakers, who cautioned that the sterling’s plunge was spurring inflation from higher import costs.
In a compelling speech, Catherine Mann said the nine-strong monetary policy committee (MPC), which she joined in 2021, was at risk of trailing behind rival central banks that were taking a more aggressive approach to address inflationary pressures.
Mann’ who voted for a 0.5% rise in the Bank’s base rate at a meeting last week, said she was most worried about the signal from the US Federal Reserve that it intended to hike rates several times after a 0.75% raise this month.
The former investment bank economist said the UK was exposed to financial flows that hunted down countries with the largest interest rates. Funds could leave the UK for the US seeking higher interest rates unless the Bank’s plans for higher rates kept pace.
Mann said in a speech at an event hosted by MNI Market News:
“In my view, a more robust policy move … reduces the risk that domestic inflation already embedded is further boosted by inflation imported via a sterling depreciation.”
The Bank increased its benchmark interest rate by 0.25 percentage points to 1.25% last Thursday and said it was prepared to act “forcefully” if necessary to eliminate the risk presented by inflation. Mann and the other two members of the MPC backed a 0.50 percentage point hike.
In the past, the Bank had taken a conservative approach to increase rates and refrained from reducing them quickly when lower borrowing costs were required to hold up the economy, she said.
The existing crisis has called for a more aggressive approach to hiking rates and acknowledgment by the MPC that interest rates will need to be reduced promptly when price pressures ease, perhaps as soon as 2023.
She said there were signs that the surge in inflation – which reached a 40-year high of 9% in April – was becoming more rooted and continuous, and had more momentum after government support measures for households.
“Even though higher energy and food prices are hitting real incomes, countervailing factors importantly and increasingly are likely to support consumer spending in the near term.”
“These include the two fiscal packages, strong employment, widespread bonuses as well as robust wage growth, strong housing values, accumulated savings, quality trade-down, and borrowing through credit cards among other schemes.”
“All told, to the extent that consumption growth remains stronger than expected based on real income, this would support firms’ pricing expectations and decisions, and add to domestic upside risks to inflation.”
Rate hikes by the Fed and the European Central Bank would cause further downward pressure on the sterling pound, which would enhance inflation pressures, she said. Mann added:
“I open the door to a policy rate reversal in the medium term when the domestic supports to demand fade and when weakness in external sources of demand bite.”
