Market News

BY  Heather Stewart Economics editor

Bank of England policymakers must proceed cautiously – like mountaineers – as they cut interest rates in the months ahead as inflation risks rise, according to the central bank’s deputy governor, Dave Ramsden.

In a speech at Stellenbosch University in South Africa, Ramsden – a climber himself – returned to the mountain analogy previously used by the Bank’s chief economist, Huw Pill, to describe the path of interest rates.

Ramsden said: “A gradual and careful approach is always needed on the way down a mountain to ensure a safe descent and a successful outcome. But that doesn’t always mean the descent has to be slow.

“There may be circumstances when a slower-than-expected descent is justified but there will also be times when conditions require that the pace has to quicken.”

The Bank cut rates by a quarter point to 4.5% earlier this month and signalled that it expects to continue reducing borrowing costs, despite forecasting a “bump” in inflation in the coming months.

In an address that repeatedly stressed the heightened uncertainty facing policymakers, Ramsden said that inflation is now as likely to overshoot as to undershoot.

Ramsden backed a quarter-point interest rate cut in December, against the majority, fearing the jobs market was cooling rapidly and could lead inflation to undershoot.

But with the Bank now expecting inflation to rise to 3.7% later this year, and average weekly earnings growth to be 6.75% in the first quarter, much higher than previously forecast, he now believes the risks are balanced.

“Because of the evidence of recent months, I no longer think that risks to hitting the 2% inflation target sustainably in the medium-term are to the downside. Instead, I think they are two sided,” he said.

He highlighted particular uncertainty about the outlook for the jobs market. Policymakers are concerned about the risks of a rapid downturn as the government’s increase in employer national insurance contributions takes effect in April – but are also worried about recent stronger-than-expected wage data.

Ramsden also pointed to the risks around trade policies, with Washington threatening tariffs on a slew of countries. “The UK is a relatively small open economy so these matter,” he said.

Markets are expecting the Bank to keep interest rates on hold at its next policy meeting on 20 March but have priced in two further cuts this year, taking the Bank rate down to 4%.