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It’s too soon to cut interest rates, says Bank of England policymaker

Megan Greene
Megan Greene joined the MPC last summer and voted until December to increase rates further to 5.5pc - Hollie Adams/Bloomberg

It is too soon to cut interest rates without more evidence that pay growth and inflation are really under control, a top Bank of England policymaker has warned.

Megan Greene, a member of the Bank’s Monetary Policy Committee (MPC), said unemployment has been surprisingly low for an economy which has just suffered a recession, while pay growth is still unusually high.

She said: “There is a lot of uncertainty about how much inflation persistence is still in the system versus how much we have already squeezed out with our restrictive monetary policy stance.

“For me, I would need to see more evidence of inflation persistence waning in line with my own expectations to think that a cut and a less restrictive policy stance would be warranted.”

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The MPC, led by Andrew Bailey, the Bank’s Governor, raised interest rates from 0.1pc in December 2021 to 5.25pc last September, as they battled to bring down inflation.

Economists expect inflation data for April, which will be published next week, to show that consumer price inflation has fallen back to around the 2pc target, down from its peak of 11.1pc in October 2022.

But Ms Greene, who joined the MPC last August and voted until December to increase rates further to 5.5pc, said that falling inflation was largely a result of declining energy prices.

These are in large part determined by international markets, which means it is not necessarily evidence that underlying inflationary pressures in the UK economy are back under control for the long-term.

Ms Greene added: “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.”

That will include looking at pay growth, unemployment and inflation in the services industry.

Ms Greene said on Thursday that unemployment has remained low despite the recession, and pay has kept rising in part because of “labour hoarding”, as employers hold onto staff even when sales are low.

Another reason may be the rise of economic inactivity, as people of working age drop out of the jobs market altogether, and are neither in a job nor looking for a job.

Since the start of the pandemic the number of inactive adults has risen by more than 1 million to 9.4 million. This includes 2.8m million who give long-term sickness as the reason, an increase of 708,000 people.

Ms Greene said: “As workers have left the pool of active jobseekers, this has mechanically reduced the unemployment rate.

“Falling participation has reduced the unemployment rate by around 2 percentage points compared to pre-pandemic levels.”

The Recruitment and Employment Confederation (REC) said there were more than 1.7 million jobs vacancies available last month.

That is a drop of more than one third on April of last year, but still means there are more positions available than there were before Covid, indicating the jobs market remains tight.

Meanwhile the European Central Bank warned that indebted governments face challenges from high borrowing costs and any future economic or geopolitical shocks.

“High levels of debt make euro area sovereigns vulnerable to adverse shocks, especially given the structural weakness in productivity and potential growth,” the ECB said in its financial stability review.

“Public debt levels in most euro area countries are expected to remain above pre-pandemic levels in the short to medium term.

“More importantly, structural headwinds to potential growth, from weak productivity for instance, are raising concerns about longer-term debt sustainability, making sovereign finances more vulnerable to adverse shocks and elevating risks to the financial stability outlook.”

The cost of living crisis has shocked British families into saving an extra £54bn per year, according to economists at the Resolution Foundation.

Households are saving 6pc of their disposable incomes, a rate not seen for 30 years, aside from during the pandemic lockdowns. This is four times the 1.5pc typically saved pre-Covid, the think tank said.

Prices have risen faster than wages since the start of the pandemic, but families have cut back spending hard in response, allowing them to put more away for a rainy day.

Energy use is down 11pc and food purchases are down 7pc, while the amount of household goods bought, such as appliances and crockery, has been slashed by almost one fifth.

James Smith, research director at the Resolution Foundation, said the experience of the past three years “has turned us from a nation of spenders to a nation of savers”.

“The sheer scale of this near three-year inflation shock has reshaped the economy and public finances, and changed what people do with their money,” he said.

Over the same period families have cut their debts by £48bn, or £1,700 per household, the think tank said.

However, more saving threatens to harm economic growth in the short term.

Spending on credit and debit cards last week was down almost 8pc on the same period of last year and hit the lowest level since September 2022, according to the Office for National Statistics. It indicates that households are cutting back on spending, with potentially painful ramifications for retailers.