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Interest rates will rise again despite positive economic signs, says rate-setter

interest rates A general view of the Bank of England as it raises UK interest rates to 4%. (Photo by Vuk Valcic / SOPA Images/Sipa USA)
The financial markets are pricing in one more interest rates increase to 4.25% this spring. Photo:Vuk Valcic/ SOPA Images/Sipa USA (Sipa US, Sipa US)

The Bank of England is more likely to raise interest rates again than to start cutting them, rate-setter Catherine Mann said.

Mann, one of the most hawkish members of the committee, said uncertainty around when the turning point for inflation would come "should not motivate a wait-and-see approach" over setting interest rates.

"We need to stay the course, and in my view the next step in bank rate is still more likely to be another hike than a cut or hold," Mann said in a speech delivered to the Lamfalussy Lectures Conference in Budapest.

Mann said it would be more of a mistake to stop tightening too soon, than too late.

She said: “I am looking for a significant and sustained deceleration in higher frequency price increases and in the underlying inflation measures and expectations towards inflation rates that are consistent with achieving the 2% target.

“Uncertainty around turning points should not motivate a wait-and-see approach, as the consequences of under tightening far outweigh, in my opinion, the alternative.”

Watch: How does inflation affect interest rates?

The Bank of England raised the UK interest rates by 0.5 percentile points to 4%, the highest since the financial crisis of 2008.

Read more: Interest rates: Bank of England's Bailey warns UK inflation still stubborn

The financial markets are pricing in one more increase, to 4.25%, this spring, before rates drop back to 4% by the end of this year.

Last week, BoE governor Andrew Bailey said: “The extent to which inflationary pressures ease will depend on the evolution of the economy and the impact of the significant increases in bank rate so far.”

He added: “If there were to be evidence of more persistent pressures, then further tightening of monetary policy would be required.”

But he said that the Monetary Policy Committee (MPC) had softened its language on future rises in interest rates because the economy is turning a corner on inflation.

“I think that reflects that we have seen a turning of the corner, but it’s early days and the risks are very large. And it’s really that which shapes where we go from here.

“If those risks emerge and if we continue to get overshoots as we’ve seen, particularly in the wage settlement data and services inflation, then we will have to respond to that, because that would be evidence that these risks are crystallising.

Read more: Bank of England raises interest rates to 14-year high of 4%

“If the economy were to evolve as the central case of the forecast suggests then we would have to re-evaluate as we always do.”

The MPC voted by a majority of 7–2 to increase bank rate by 0.5 percentage points, to 4%.

Two members, Swati Dhingra and Silvana Tenreyro, preferred to maintain bank rate at 3.5% – they had both voted for no change in December as well.

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