Bank policymaker says pausing interest rate rises ‘risks worst of both worlds’

A Bank of England policymaker has said interest rates should be raised even further to control inflation, despite financial market expectations that the UK’s base rate may be nearing a peak.

Catherine Mann, an economist and external member of the Bank’s Monetary Policy Committee (MPC), gave a speech at an event held by think tank the Resolution Foundation.

Ms Mann said she believes it is too soon to stop tightening monetary policy – or raising rates – because it risks inflation becoming too persistent and embedded into the economy.

The Bank of England hiked rates to 4% at the last MPC meeting, and hinted that it could be nearing the end of its rate hike cycle unless it sees signs of persistent inflationary pressure.

But Ms Mann has been more hawkish than other members of the nine-person MPC, often voting for higher rate rises than what is agreed.

Ms Mann said: “Given that the risk of increasingly persistent inflation rises disproportionately with the share of backward-lookingness, I believe that more tightening is needed, and caution that a pivot is not imminent.”

She explained that backward-looking firms are more likely to respond to past inflation levels, which can keep inflation persistent and change the effectiveness of monetary policy.

Whereas forward-looking firms are more likely to react to policy rates.

“An often underappreciated feature of macroeconomics is that expectations about the future can influence the present”, she explained.

Ms Mann said she believed financial conditions are currently looser than they need to be to tackle inflation.

“I worry that this constellation could yield extended persistence of inflation into this year and the next”, she said.

“We have an inflation remit, and we will achieve it one way or another.

“Failing to do enough now risks the worst of both worlds – the higher inflation and lower activity of the ‘purple’ regime – as monetary policy will have to stay tighter for longer to ensure that inflation returns sustainably back to the 2% target.”

The “purple” regime is a model that Ms Mann used to depict an economy influenced by mainly backward-looking firms.

She added that, while monetary policy has been “historically aggressive”, it has potentially been insufficient given multiple economic shocks that have pushed up inflation.

The UK’s consumer prices index (CPI) inflation rate hit 10.1% in January, easing off the peak of 11.1% it reached in October.

But the Bank of England insists its role is to bring inflation down to the 2% target.