Monetary policymakers must “stay the course” with forceful action to lower inflation, however difficult the consequences may be for the UK economy, a Bank of England deputy governor has warned.
Dave Ramsden voted last month for a more aggressive move than the 0.5 percentage point interest rate increase favoured by the majority of the BoE’s monetary policy committee. This was to combat the risk “that a more inflationary mentality takes hold throughout the economy”, with the government’s cap on energy prices set to boost household spending, adding to demand pressure, he told a conference on Friday.
The fiscal measures announced by the chancellor since then would have a “material” impact on the economic outlook over a three-year period relevant to monetary policy, Ramsden said.
He added that the market turmoil since the measures were outlined could also have a “significant direct effect” on the MPC’s forecasts, which are based on assumptions about certain asset prices.
The big rise in market expectations of future interest rates was already having an impact on the real economy through mortgage markets, he said, while noting that it would be difficult for the MPC to assess the longer-term implications without a clearer picture of the outlook for fiscal policy.
“One key consideration for the MPC at its upcoming meetings will be whether the recent repricing of UK assets reflects a changed assessment by markets of the UK macroeconomic policy mix between fiscal and monetary policy,” he said.
“The extent to which that can be determined will depend on whether markets settle at a new level, which itself will depend in part on getting a clearer picture on fiscal policy and the fiscal outlook.”
Source: Economy - ft.com
