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The UK is set to lag behind its peers in returning inflation to target, a Bank of England interest rate-setter has warned, as she argued for a further increase in the cost of borrowing.
Catherine Mann, an external member of the BoE’s Monetary Policy Committee, questioned whether recent falls in headline price growth would continue, pointing to factors such as rising real incomes and a tight labour market.
Financial conditions had “eased too much already” as investors priced in expectations that the central bank would start cutting rates from 5.25 per cent, Mann said in a speech on Thursday.
The “upside risks” to shipping and insurance costs from the Red Sea turmoil could add to Britain’s inflation problem, she added.
“UK inflation dynamics have been compared to both the US and those of the euro area, with some people suggesting that the UK is just a ‘bit later’ than its peers in returning inflation to target,” Mann told the Official Monetary and Financial Institutions Forum. “A look at the data suggests to me that the ‘bit later’ might be quite a while later.”
The nine-member MPC last week held interest rates at their 16-year high. But it signalled that the next move in rates was likely to be down — provided that there was further evidence of lower inflation, which stood at 4 per cent in December.
Along with peers around the world, the BoE’s inflation target is 2 per cent.
Mann and fellow external MPC member Jonathan Haskel were alone in advocating for another increase in interest rates last week. One member, Swati Dhingra, argued for an immediate cut of 0.25 per cent.
Mann acknowledged that her decision to vote to lift the BoE’s benchmark rate to 5.5 per cent was “finely balanced” but pointed to slower progress by the UK in pulling down inflation compared with the trends in the US and Eurozone.
She said UK services inflation, on a three-month annualised basis, was 3.3 percentage points above headline inflation, compared with 1.8 and 0.7 percentage points in the US and euro area respectively. Services inflation is closely monitored by policymakers as a better measure of domestic price pressures.
Mann questioned how quickly goods and services prices in the UK would return to patterns consistent with the 2 per cent target. “I am not convinced that the near-term deceleration in headline inflation will continue,” she concluded.
In an interview after the MPC meeting last week, Dhingra told the Financial Times that the BoE may be “underplaying the downside risks” for the economy in keeping rates at 5.25 per cent.