Leaving interest rates high for too long risks harming UK households and the wider economy, a Bank of England rate setter has warned.
The direction of inflation was “clearly downwards”, said Professor Swati Dhingra, who cautioned that even the smallest cut in interest rates would still be restrictive.
“The evidence to err on the side of overtightening is not compelling in my view as it often comes with hard landings and scarring of supply capacity that would weigh further on living standards,” she warned in a speech.
Prof Dhingra was the only member of the Bank’s Monetary Policy Committee (MPC) to vote for a rate reduction from 5.25 per cent to 5 per cent last month.
She warned of the risks of not cutting interest rates soon enough, adding that such a stance “comes with pretty substantial costs”.
Several of her MPC colleagues say they want to see more evidence that inflation is falling towards the Bank’s 2 per cent target.
Andrew Bailey, the Governor of the Bank of England, earlier this week rejected MPs’ accusations that the Bank’s reluctance to cut borrowing costs despite falling inflation meant it was “behind the curve”.
Mr Bailey said the question for the Bank was how long interest rates needed to remain restrictive to bring inflation sustainably back to target. “We are not there yet,” he told MPs.
Professor Dhingra said the MPC’s caution could come at a cost, warning: “Waiting for lagging indicators of domestic relative price growth to fall sharply before reducing rates comes with a cost of foregone improvements in living standards and a risk of lowering supply capacity for the future.”
UK consumption remained behind pre-pandemic levels in contrast to other economies such the US, Professor Dhingra said, and the effect of 14 rate hikes in a row would continue to be felt for some time.
She warned that the economic backdrop remains weak despite signs from business surveys that the UK returned to growth at the start of 2024.
“The outlook for demand remains weak and less resilient than previously assumed,” Professor Dhingra said. And she added: “This further diminishes the likelihood of sustained inflationary pressures.”
The UK economy “flatlined over the last year”, she said, with rising rents and mortgage costs hitting spending plans.
Professor Dhingra said that some other advanced economies have not faced “the difficult trade-off between lowering inflation and sacrificing recovery to the same degree as the UK”.
US multinational investment bank and financial services company Goldman Sachs said it expected the first interest rate cut to be made in June. It had previously forecast this would take place in May.
