BOE Must Continue Raising Rates Regardless of Pain, Ramsden says - BLOOMBERG
NOVEMBER 24, 2022
(Bloomberg) -- The Bank of England must continue raising interest rates to bring inflation back to 2% despite the economic hardship facing households, two policy makers said Thursday.
Citing worries about the tight labor market and high inflation expectations, Deputy Governor Dave Ramsden said his bias was for further tightening. Those concerns were echoed by fellow rate setter Catherine Mann, who said there is little monetary policy can do to help households struggling with soaring energy and food prices.
The BOE has raised rates eight times since December to a 13-year high of 3%, and markets expect another half-point increase next month. Ramsden and Mann are among the most hawkish members of the nine-member Monetary Policy Committee, having consistently made the case for more aggressive moves.
Inflation is at 11.1%, more than five times the target level. However, the MPC is split over how much more tightening is needed, given the dampening effect on demand of a looming recession.
Two members voted to raise rates by less than 75 basis points this month, arguing that the cost of living crisis made the case for a more gradual approach. Real wages are expected to fall 7% over the next two years.
Speaking at a conference in London, Ramsden said he was more concerned that the BOE forecast, which shows inflation falling below target in 2024, may overstate the weakness of the economy at a time of sustained labor market tightness and increasing inflation expectations.
He worries about an “emergence and embedding of an inflationary mentality” and faster-than-expected wage growth.
“However challenging the short term consequences might be for the UK economy, the MPC must take the necessary steps in terms of monetary policy to return inflation to achieve the 2% target sustainably in the medium term,” he said.
He added that the big fiscal tightening announced in the autumn statement “will have very little effect” on rates as the vast majority of the measures do not come into effect until the end of the BOE’s three-year horizon.
Ramsden expressed skepticism about the depth of recession that the BOE is predicting and said he is doubtful that unemployment will rise to 5% from current levels of 3.6%.
“There are many other judgments in the forecasts where the risks are uncertain,” he added. The BOE was criticised this week by the Office for Budget Responsibility for assuming that households will not dip into their savings at all during the recession.
In a panel discussion at the Bank of England Watchers’ Conference, Mann said companies and consumers are still expecting prices to be rising by around 4% in two years.
“It is more costly to get inflation down once medium-term inflation expectations have become out of control,” she said. Authorities needed to “pick up their socks and do more work” when it comes to tackling domestic inflationary pressure in services and the labor market.
However, while prices and wages are both rising, there is no evidence that a spiral has taken hold where higher pay to compensate workers for inflation lead firms to keep raising prices to protect their profit margins, she said.
--With assistance from Liza Tetley.