The Bank of England needs to see more conclusive evidence that strong inflation pressures are becoming less stubborn before it cuts interest rates, rate-setter Megan Greene has said.
Ms Greene said there was more uncertainty over the degree to which inflation – in the tight labour market – was easing than about how the Bank’s high interest rates were weighing on the economy.
“In considering for how long we must retain our restrictive stance before policy should be eased, I think the burden of proof therefore needs to lie in inflation persistence continuing to wane,” she told a conference at Make UK, a manufacturing industry body.
She said she believes “two puzzles” in the UK labour market are making it harder to judge the extent to which inflationary pressure may persist.
The first was unemployment remains low despite weak economic performance and the second is that wages are rising faster than expected.
Labour hoarding by employers – who retain more staff than needed for uncertainty of being able to replace them – may be reasons, she suggested.
And she warned that if the hoarding suddenly ended, unemployment could rise more sharply than the Bank had forecast, thereby warranting a cut in interest rates.
Ms Greene voted last week to keep the Bank rate at 5.25 per cent – its highest since 2008 – along with the majority of the Bank’s nine-strong Monetary Policy Committee (MPC), although two members backed a cut.
In April, she said interest rate cuts should remain “a way off” because of the persistence of inflation pressure.
The Bank’s Governor, Andrew Bailey, said last week that a rate cut at the next MPC meeting in June “is neither ruled out nor a fait accompli.”
Financial markets expect a roughly 50 per cent chance of a first quarter-point rate cut next month and a reduction in August is seen as a certainty, followed by another cut before the end of the year.
Official figures next week are expected to show consumer price inflation slowed to close to the Bank’s 2 per cent target in April, helped by falling energy costs and down from a peak of 11.1 per cent in October 2022.
But services price inflation – which stood at 6 per cent in the 12 months to March, reflecting strong wage growth – is likely to remain higher than the headline rate, posing a risk of sticky long-term price pressures and preventing the Bank from moving quickly to cut borrowing costs.
This week, the Bank’s chief economist, Huw Pill, said it might consider cutting rates over the summer although he repeated his concerns that the labour market remains tight by historical standards.
