Threat of lingering inflation looms larger in the UK, says BoE ratesetter

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Cuts in UK interest rates “should still be a way off”, according to one Bank of England policymaker, arguing investors were underestimating the risk that high inflation would linger for longer in Britain than in other advanced economies.

Megan Greene, one of the more hawkish members of the BoE’s monetary policy committee, questioned market pricing that suggested the UK’s central bank would cut rates earlier and by more than the US Federal Reserve this year.

Before the release of unexpectedly high US inflation data on Wednesday caused traders to slash bets on early US rate cuts, they had been expecting interest rates to follow a similar path on both sides of the Atlantic, she wrote in the FT.

But in the UK, which had faced the “double whammy” of a very tight labour market and a far bigger energy price shock, “inflation persistence” was a greater threat than in the US or other advanced economies, she argued.

“The markets are moving rate cut bets in the wrong direction,” she wrote. “In my view, rate cuts in the UK should still be a way off as well.”

Greene has taken a more hawkish view than the majority of the nine-member MPC on several occasions since she joined it last August. Last month, however, she voted with most of the members to leave the BoE’s benchmark rate at a 16-year high of 5.25 per cent.

Her comments echo those of Jonathan Haskel, another MPC hawk, who cautioned in a recent interview with the FT that interest rate cuts should be “a long way off” because a near-term fall in headline inflation would not be a reliable guide to “persistent and underlying” inflationary pressures.

UK consumer price inflation fell to 3.4 per cent in February, its lowest level since 2021, and big declines in household energy bills will drag it down further in the near term.

But the BoE’s latest forecasts suggest this drop will be temporary, with domestic price pressures pushing headline CPI back above the central bank’s 2 per cent target for much of the next two to three years.

Both Haskel and Greene argue that UK wage growth and services inflation remain too high for comfort, despite recent signs that pressures in the labour market are finally easing.  

However, other BoE rate-setters have offered a more upbeat view.

Andrew Bailey, the central bank governor, told the FT last month that rate cuts were “in play” at future MPC meetings and that the committee should not wait for annual growth in wages and services prices to halve from the current pace before it was willing to ease policy.

Huw Pill, the BoE’s chief economist, has also made it clear that policy would remain “restrictive” even with interest rates below their current level, meaning that the BoE would still be bearing down on inflation even after it had begun to ease policy.  

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