By David Milliken and William Schomberg
LONDON -Bank of England interest rate-setter Catherine Mann said on Thursday that borrowing costs would probably have to rise further as consumer demand is unlikely to fall soon enough to stop businesses from pushing through price increases.
Mann was part of a minority of BoE policymakers who voted for a half-percentage point increase in interest rates in February, because of a concern about rising inflation expectations. She voted for a quarter-point rate hike in March.
“The domestic inflation ratchet … has been my central concern,” Mann, one of nine Monetary Policy Committee members, said in a speech.
“We want to avoid inflation getting out of control. And it may mean that interest rates go up a little bit,” she added in a later question-and-answer session.
In the past, central bankers assumed they could largely ignore a one-off inflationary shock, such as a spike in oil prices, Mann said.
But Britain had faced a series of shocks in recent years – starting with a fall in sterling because of the 2016 Brexit vote, followed by COVID-19 supply-chain bottlenecks and now the surge in energy prices, intensified by the war in Ukraine.
The BoE needed to push back against any assumption by firms that this was a normal state of affairs, Mann said.
“Monetary policy needs to keep inflation expectations anchored; by doing so now, less tightening will be required later, when demand may still be weak.”
BoE interest rates currently stand at 0.75%, and financial markets expect them to reach 2.25% by the end of the year, though many economists think the rise will be less.
British inflation hit a 30-year high of 7% in March, and the BoE last month warned that the bigger-than-expected pick-up in prices would squeeze economic growth later this year.
However, Mann said it was not obvious to her that this fall in consumer demand would come soon enough to prompt businesses to rein in upcoming price rises.
“Tracking these price expectations and forecast revisions is of paramount importance since inflation ultimately is due to firms systematically able to raise their prices,” she said.
Moreover, the structure of British regulated energy prices – which makes a further rise in power tariffs highly likely in October – would extend the period of high inflation.
On Tuesday the International Monetary Fund forecast Britain would have the highest inflation of any major advanced economy next year, as well the slowest growth.
Mann did not want to comment on the chance of a recession while the central bank was in the middle of updating forecasts for its May meeting, but said there were already some characteristics of stagflation.