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Interest rate rises only way to tame UK inflation, warns Bank of England deputy governor

Bank of England deputy governor Dave Ramsden Interest rates
Interest rates: Bank of England deputy governor Dave Ramsden had voted for a 0.75% rise in monetary policy committee meeting in September. Photo: Justin Tallis/AFP via Getty

Bank of England (BoE) deputy governor Dave Ramsden on Friday suggested that the central bank will stay on track to raise interest rates, hinting it is the only way to tame inflation sustainably.

Ramsden, who is also a member of the Bank's Monetary Policy Committee (MPC) was discussing shocks, uncertainty, and the monetary policy response in a speech at the Securities Industry Conference.

UK Inflation was running at 9.9% in August, nearly five times the Bank's 2% target.

"Unlike earlier inflationary episodes, where we saw more persistence in inflation caused by ineffective policy and policy frameworks, this time we have a monetary policy framework which empowers us to take action," the deputy governor said.

"However difficult the consequences might be for the economy, the MPC must stay the course and set monetary policy to return inflation to achieve the 2% target sustainably in the medium term, consistent with the remit given to us."

He highlighted four shocks facing the UK economy in his address: the Russian invasion of Ukraine; the fall in UK labour market participation; UK fiscal policy and financial market turbulence.

Read more: Interest rate rises: what you need to know in 10 points

Ramsden said chancellor Kwasi Kwarteng's mini-budget may add materially to inflation as he signalled that all nine rate-setters on the MPC plan to act "forcefully" to tackle rampant price growth.

The finance minister announced £45bn in unfunded tax cuts which caused volatile trading for both the pound and stock markets, he has since reversed on the 45p tax cut — slashing £2bn from the overall costs.

He echoed colleagues Huw Pill and Jonathan Haskel, describing the jump in UK borrowing costs after the mini-budget as: "Undoubtedly a UK-specific component".

"Recently lenders have also withdrawn a large number of mortgage products from the market because of the turbulent market conditions," Ramsden said.

"UK-specific factors also have had a particular effect on the price of long-dated UK government debt, which fell very sharply over a very short period, leading to dysfunction which, had it continued or worsened, would have been a material risk to UK financial stability."

Chart: Bank of England
Chart: Bank of England

The Bank has raised UK rates by 0.5% at its last two meetings — the biggest rises in 27 years. Ramsden was one of three policymakers who pushed for an even larger, 0.75%, lift last month, but were outvoted.

Threadneedle Street is due to meet on 3 November, and the deputy governor said policymakers will also whether consider whether the "recent repricing of UK assets" reflects a changed assessment by markets of the UK macroeconomic policy mix between fiscal and monetary policy.

Read more: Pound run: BoE chief economist signals 'significant monetary response'

The speech comes a day after the central bank said that its emergency intervention last week saved Britain from being on the brink of a financial crisis.

On 28 September, Threadneedle Street announced a programme of temporary purchases of long-dated UK government bonds.

The Bank said it would buy up to £65bn ($73bn) in gilts over a 13-day period in response to the mini-budget. It could spend as much as £5bn per day on long-dated gilts, but has only bought around £4bn in total so far.

The deputy governor also said the rise in energy prices has been a "significant contributor" to inflation over the last year in the UK and the Euro area.

For the UK economy a "key characteristic" of the global energy shock is that it depresses supply, the BoE chief told the conference.

Read more: Bank of England says £65bn intervention prevented financial crisis

"The UK is a net importer of energy so national income will be lower; the UK economy is poorer." Ramsden added. "These effects were already apparent before Russia’s invasion of Ukraine but the war has exacerbated them, and even with the Guarantee households and businesses will be worse off due to higher energy bills than they were a year ago, intensifying the problems associated with the cost of living."

Last month, the government unveiled an energy support package that freezes bills at £2,500 a year from October for two years, and a six-month energy support scheme for businesses, costing £60bn in the first six months.

Watch: How does inflation affect interest rates?