Bank of England policymaker Swati Dhingra has warned that leaving interest rates at their 16-year highs of 5.25% risks “scarring” parts of Britain’s economy and hurt UK households struggling amid a cost of living crisis.
“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,” she said at an event hosted by MNI Connect.
Dhingra was the only member of the Monetary Policy Committee to vote for a cut in interest rates at the Bank’s last meeting earlier this month.
Read more: Bank of England could cut interest rates before inflation hits 2%, Bailey says
The other members of the MPC want to see more signs that inflation is moving sustainably to the Bank’s 2% target.
BoE governor Andrew Bailey has since indicated the possibility of interest rate cuts even before inflation reaches the target.
The BoE is forecasting a decline in inflation to 2% in the spring from the current 4%, as high energy prices ease.
Dhingra said that the outlook for headline inflation is “bumpy but downwards.”
“Price developments strongly signal that inflation is already on a path of sustainably meeting our target over the medium term,” she added.
The policymaker warned that waiting around to cut interest rates was not costless.
“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.”
Read more: Jeremy Hunt handed pre-budget tax boost as UK posts record borrowing surplus
The central bank’s former chief economist last week warned that the Bank of England risked making the UK’s recession worse unless it started cutting interest rates soon.
Andy Haldane, who left the Bank in 2021 after 32 years, said his former colleagues should consider loosening policy to support the economy.
Asked by Bloomberg whether the BoE could worsen the recession unless it loosened policy soon, Haldane said: “I think that’s where the balance of risks lies, yes.”
“For me the case for putting in place some upfront, early insurance on the monetary policy side is strong and strengthening, and I’m fearful we leave that insurance a little too late in the year.”
The financial markets expect the Bank to cut rates to 4.5% by the end of this year, with the first cut pencilled in by June.
Watch: Bailey: BoE can cut rates before inflation target met
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