Market News

BY Mauricio Alencar

Several members on the Bank of England’s Monetary Policy Committee have warned that sticky inflation could stall further interest rate cuts this year in marked contrast to current analyst expectations.

Bank policymakers voted to lower interest rates to 4.25 per cent last week. Two MPC members voted for a 50 basis point cut, and another couple voted for rates to be held.

In further signs that the Bank is taking a hawkish view on interest rate cuts, three members of the MPC told an audience at a conference hosted by King’s Business School in London that persistently high inflation – driven by people’s worries about their economic prospects – could slow down the Bank’s rate-cutting cycle.

Deputy governor Clare Lombardelli, London Business School lecturer Megan Greene, and American economist Catherine Mann suggested that MPC members were heavily concerned about the upside risks of inflation.

Lombardelli expressed concern about high wage growth, which she described as a “key driver” of underlying inflation.

“Wage growth is still too high to be consistent with inflation at target,” Lombardelli said, adding that annual pay growth of 5.9 per cent in February could reflect “second-round effects” pushing up inflation this year.

“The evidence suggests that at 4.25 per cent monetary policy is still restrictive, so if we were to find ourselves in a world with greater inflation persistence than expected, policy would still be providing pressure to squeeze inflation out of the system.

“It would be doing that whilst having taken out some insurance against the risk of a larger fall in demand through the 25bps cut in May.”

While Lombardelli said she was “balanced between holding and cutting rates, her latest comments suggest Lombardelli voted for to slash Bank Rate by 25 basis points due to fears President Trump’s trade war would hamper demand and subsequently lead to lower price growth than previously expected.

“Caution remains appropriate,” she also said.

“I’ll be more comfortable when I see material deceleration in the data over a longer period.”

Split over interest rate cuts

Greene, who is widely seen as one of the MPC’s most hawkish members, suggested inflation could not be seen as “transitory” given Britons’ expectations of prices rising in the next few months.

“There is still reason to be concerned about inflation persistence,” Greene said.

The Bank’s interest rate cut was the fourth since it began its rate-cutting cycle in the middle of last year, just over half a year after inflation peaked at 11 per cent in October 2022.

It came amid a vigorous trade war between the US and China which has since been de-escalated after the two countries agreed to reduce tariffs on one another for a period of three months.

Greene and Lombardelli voted for an interest rate cut. In contrast, external member Mann voted for interest rates to be held, despite calling for a 50 basis point cut at a decision in February.

Speaking at the Bank of England watchers’ conference in London, Mann pointed to the risk of volatility on people’s expectations of prices surging.