Bank of England rate setter says inflation risk is falling after calling for jumbo rate cut

Fears of a major inflationary resurgence are overblown and wider economic woes will keep price rises in check this year, according to a Bank of England policymaker. 

Catherine Mann, whose calls for a more aggressive base rate cut were overruled by MPC colleagues last week, said Britain should not be ‘dismayed’ by a recent inflationary ‘hump’.

Mann expects weak economic growth, poor consumer strength and a loosening jobs market to limit companies’ pricing power, thereby holding back price growth.

However, she warned interest rates will settle far higher than levels experienced in the years after the global financial crisis.

The MPC last week voted by a margin of seven to two to cut the base rate by 25 basis points to 4.5 per cent, with Mann and long-time dove Swati Dhingra the dissenters calling for a larger cut of 50bps.

Mann’s first vote for a cut during this cycle marked a departure from her comments in August, when she warned Britain not to be ‘seduced’ into believing that the battle against inflation is over, citing wage growth and related concerns in the services sector.

The Bank said last week a ‘gradual and careful approach to the further withdrawal of monetary policy restraint was appropriate’, adding the borrowing rates ‘would need to remain restrictive for some time… given structural persistence and macroeconomic volatility’.

But Mann, who is a professor at Brandeis University in the US and former global chief economist at Citibank, said on Tuesday that the BoEs’s first two 25bs cuts last year ‘had not appreciably loosened financial conditions’.

She told an audience at Leeds Beckett University the consumer price index, which is forecast to rise from 2.5 to 3.5 per cent by June, had been driven by ‘administered and indexed prices’ unrelated to ‘underlying domestic inflationary pressures’ such as water bills and insurance.

Mann added: ‘About half of the hump comes from energy and food prices, which are salient for expectations… but, again, are less related to immediate domestically generated price pressures.

‘Wage settlements and the pricing power of firms will determine how much inflation outcomes will be driven by expectations as well as the one-off factors. I judge that both will face strong headwinds, including from the monetary stance.’

She said that wage growth, which has been a significant driver of recent price increases, particularly in the crucial services sector, will continue to slow on the back of weaker consumer demand and a ‘further loosening’ of the jobs market

Early evidence suggests companies have started cutting jobs and hiring intentions, partially as a result of increases in employer national insurance contributions and the national living wage announced in the Autumn Budget.

Vacancies are now below their pre-Covid level, while recent ONS data showed employment growth flat last month.

Mann said: ‘These factors likely will restrain pass-through to wages and prevent second-round effects from setting in.’

However, Mann said volatility in inflation ‘likely requires’ a higher base rate because ‘the MPC will have to lean against the combination of larger or more prevalent shocks and downwardly rigid wage and price responses’.

She expects base rate will average ‘well above’ previous forecasts.

Mann said: ‘Our Market Participants’ Survey have been consistent in putting this longer-run [base rate] average at about 3 to 3.5 per cent.

‘I’m more likely at the higher end of that range.’