Bank of England policymaker Catherine Mann on Friday indicated more interest rate rises would be needed in the coming months, and said current price and wage expectations are “inconsistent” with the central bank’s 2 per cent inflation target.
“Going into 2022, current price and wage expectations coming from the monthly decision maker panel [a monthly business survey] are inconsistent with the 2 per cent target, and if they are realised in 2022 are likely to keep inflation strong for longer,” Mann said.
In a speech to the Official Monetary and Financial Institutions Forum, a central banking think-tank, she told delegates that monetary policy needs to “temper the 2022 expectations for wage and price increases to prevent them from being embedded in the decision-making of firms and consumers”.
Andrew Goodwin, economist at Oxford Economics, said the speech contained “a clear message that multiple interest rate hikes are on the way”.
Presenting the latest data, Mann noted businesses had not only raised prices by more over the past year than before the coronavirus pandemic, but that they plan to make similarly steep increases in the coming months.
“It should be a concern that the costs from 2021 are becoming reflected in price expectations for 2022,” she said, adding: “Changing expectations is the first defence against a reinforcing wage-price dynamic.”
“In my view, the objective for monetary policy now should be to lean against this ‘strong-for-longer’ scenario,” she said, hinting at rate increases.
Many economists expect the BoE to raise rates to 0.5 per cent on February 3, after having increased them to 0.25 per cent in December in the first rise for more than three years. Mann was among the Monetary Policy Committee members backing the rise. At the time, the central bank warned that further “modest tightening” was likely to be necessary to meet the 2 per cent inflation target.
Other central banks are considering policy tightening as inflation rises. The US Federal Reserve has kept interest rates at a record low but has warned it might need to raise rates sooner and at a faster rate than anticipated. However, the European Central Bank in December said it was “very unlikely” to raise rates this year.
Britain’s Office for National Statistics on Wednesday reported UK inflation had risen to a 30-year high of 5.4 per cent, with many economists forecasting it will peak in April at above the BoE’s most recent estimate of 6 per cent.
Mann said the inflation surge in 2021 was initially viewed as transitory, but it has now “morphed to more product categories and into labour markets”, with all measures of underlying inflation being well above the MPC’s target.
She pointed out tightening monetary policy is not aimed at making the UK’s cost-of-living squeeze worse, but rather the opposite. “I aim to bring inflation back down to target such that workers can enjoy real wage gains from their labour,” she said.
But Goodwin said her “idea that adding to those pressures now will mean consumers suffer less in the future is not very convincing”.
Source: Economy - ft.com
