Bank of England's Ramsden: Interest rate CUTS should be considered if economic growth and inflation wrongfoot forecasters

BoE deputy governor Dave Ramsden backed further UK interest rate hikesBut he said he would 'consider the case' for cutting rates if circumstances allowRamsden said he was 'conscious' BoE's actions were 'adding to' the situation UK inflation rose to 11.1% in October amid high energy and food prices 

A Bank of England deputy governor has backed more interest rate hikes, but said rate cuts should be considered if economic and inflationary pressures develop differently to current forecasts.

The bank has hiked several times in the past year, with the base rate currently sitting a 3 per cent, in efforts to bring down inflation from its 41-year high of 11.1 per cent.

But expectations that inflation may fall faster than expected, coupled with a worsening economic outlook, has led to the suggestion that the BoE could opt to hike more slowly and ultimately peak at a lower rate than previously forecast.

In speech at King’s College London on Thursday, deputy governor Dave Ramsden said: ‘Although my bias is towards further tightening, if the economy develops differently to my expectation and persistence in inflation stops being a concern, then I would consider the case for reducing Bank Rate, as appropriate.

He described his approach to setting policy as ‘watchful and responsive.’

Stance: Bank of England deputy governor Dave Ramsden said he would consider cutting UK interest rates if shifts in the economy were not as bad as he predicts

Stance: Bank of England deputy governor Dave Ramsden said he would consider cutting UK interest rates if shifts in the economy were not as bad as he predicts

On interest rates, Mr Ramsden said: ‘We have increased bank rate very rapidly over the last year, and on past experience a change in interest rates has its peak impact on inflation only after around 18-24 months.

‘But it is possible that the increased proportion of households on fixed rate mortgages means the full effect of policy takes longer to come through and/or is larger when it does, such that meaning that inflation comes down more quickly through 2023.’

He added: ‘There is a range of views among members of the MPC as to whether developments in inflation expectations and the potential for them to become de-anchored add to the other risks around the inflation outlook.

‘My concerns about the emergence and embedding of an inflationary mentality has been one of the factors contributing to my minority votes for a faster pace of tightening, first in February and again in September this year.’


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He said: ‘Consistent with the MPC’s strategy first set out in the August 2021 MPR, Bank Rate has been the active policy tool for tightening monetary policy, while quantitative tightening has been conducted gradually and predictably in the background, starting in March 2022 .

‘As the MPC has become increasingly focused on the prospect of more persistence in inflation, it has tightened policy more sharply.’

Mr Ramsden also touched on Jeremy Hunt’s recent Autumn Statement, cautioning that the ‘vast majority’ of the Chancellor’s measures do not come into effect until April 2025 ‘so will have very little effect over the MPC’s three-year forecast horizon, relative to what was assumed in the November MPC’.

 I am acutely conscious that our actions are adding to the difficulties caused by the current situation – Dave Ramsden

He added: ‘The MPC will be able to take full account of the autumn statement in its December policy round, and its February forecast.’

Mr Ramsden noted that UK and global markets remained ‘febrile’, and sensitive to economic and financial developments.

Commenting on the impact of surging inflation on households, Mr Ramsden, said: ‘2022 has been a very challenging year for the UK economy.

‘Millions of households and businesses are experiencing great hardship as a result of the cost of living crisis.

‘As a member of the MPC I am acutely conscious that our actions are adding to the difficulties caused by the current situation.

‘However challenging the short term consequences might be for the UK economy, the MPC must take the necessary steps in terms of monetary policy to return inflation to achieve the 2 per cent target sustainably in the medium term.

‘I am not yet confident that domestically generated inflationary pressures from increased costs and firms’ pricing pressures are starting to ease.’

Interest rates and inflation – what’s happened…and what’s next? 

At present, the Bank’s top brass look set to press on with interest rate hikes next month amid rising inflation, which is seeing swathes of households facing a prolonged cost of living crisis.

On 3 November, the Bank announced it would increase interest rates by 0.75 percentage points to 3 per cent, marking the biggest rise since 1989.

The vote to up interest rates to 3 per cent was not, however, unanimous. Monetary Policy Committee member Silvana Tenreyro favoured a quarter-point hike to 2.5 per cent, while her colleague, Swati Dhingra, voted in favour of interest rates climbing to 2.75 per cent.

On 3 November, the Bank warned the UK was facing its longest recession since records began, and claimed the country would face a ‘very challenging’ two-year slump with unemployment nearly doubling by 2025.

Official figures from the Office for National Statistics earlier this month revealed UK consumer prices index inflation hit a 41-year high in October, rising to 11.1 per cent, on the back of higher energy and food prices. Back in September, inflation stood at 10.1 per cent, and a Reuters poll had predicted a rate of 10.7 per cent for October. Analysts suggest rates could reach 4.75 per cent next year.

Food price inflation jumped to 16.5 per cent in October, representing the highest level for 45 years, according to the ONS.

In the early stages of the pandemic in 2020, the Bank cut interest rates to a record low of 0.1 per cent, in the hope of shifting the economy up a gear. They only started putting interest rates up again in December 2021.

Figures from the Office for Budget Responsibility last week suggested UK house price could fall by 9 per cent by 2024, amid higher mortgage rates and the broader economic downturn.

Under pressure: Bank of England Governor Andrew Bailey

Under pressure: Bank of England Governor Andrew Bailey

What approach is the US taking?

Other central banks around the world are grappling with rising inflation.

On 2 November, the US central bank approved a further sharp rise in interest rates as it battles to rein in fast rising prices.

The Federal Reserve said it was raising its key interest rate by 0.75 percentage points, lifting it to its highest rate since early 2008.

The Fed said it hoped that higher borrowing costs would cool the economy and bring down price inflation. But, as within the UK, critics said the move could trigger a marked downturn.

The latest increase took the central bank’s benchmark lending rate to 3.75 per cent to 4 per cent, a range that is the highest since January 2008.

However, the Fed now looks to be keen to slow down the pace of its bumper interest rate hikes in the coming months.

‘A substantial majority of participants judged that a slowing in the pace of increase would likely soon be appropriate,’ the minutes of the Fed’s November meeting said.

The minutes added: ‘A slower pace in these circumstances would better allow the committee to assess progress toward its goals of maximum employment and price stability.’

The Fed also indicated it was ready to step back from 75 basis point rate rises.

Analysts at ING said: ‘The Fed minutes surprised on the dovish side, signalling strong support for slower rate hikes and weaker support for Powell’s higher-for-longer rhetoric.

‘The dollar could stay pressured for a bit longer, but it’s probably embedding a good deal of Fed-related negatives now.’

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