Bank of England risks tipping UK economy into recession with further interest rate hikes, MPC’s Dhingra warns
The Bank of England risks tipping the UK economy into recession if it raises interest rates too aggressively and worsening the cost of living crisis, a top official said today.
Swati Dhingra, an external member of the Bank of England rate setting monetary policy committee (MPC), warned “overtightening poses a more material risk at this point” than elevated inflation embedding into the UK economy.
Doing so “risks unnecessarily denting output at a time when the economy is weak and deepening the pain for households when budgets are already squeezed through energy and housing costs,” Dhingra added at an event hosted by the economic think tank the Resolution Foundation.
Her remarks illustrate the split emerging on the MPC between officials who think rates need to keep rising to prevent high price rise increases becoming the norm and those who reckon the Bank has already done enough.
Dhingra voted in the 7-2 minority at the Bank’s meeting last month to keep rates unchanged at 3.5 per cent. The MPC’s next meeting is on 23 March.
Since December 2021, Bank Governor Andrew Bailey and the rest of the MPC has bumped borrowing costs 390 basis points higher to a 15-year high of four per cent.
That’s the fastest tightening cycle since the 1980s and was launched to try to tame inflation, which has raced to a 40-year high and, despite dropping three months in a row, is still in the double digits at 10.1 per cent.
Threadneedle Street officials are trying to balance taming price pressures without heaping too much pressure on households and businesses.
Doing the latter would make the UK economy unnecessarily weaker over the long run.
Dhingra, a prominent dove on the MPC, said the Bank should now adopt “a prudent strategy” to “hold policy steady amidst growing signs external price pressures are easing”.
A batch of recent data has illustrated the economy is performing much better than feared at the turn of the year, when the Bank was forecasting the longest recession in a century.
However, latest purchasing managers’ indexes show private sector activity is growing again, while GfK’s consumer confidence rebounded sharply last month.
Prominent MPC hawk Catherine Mann, also an external member, railed against Dhingra’s view yesterday, saying more needs to be done on rates to stop firms and workers raising prices steeply and demanding high pay increases respectively.
Dhingra emphasised today that inflation is almost being entirely driven by eye watering energy prices caused by Russia’s invasion of Ukraine and higher import costs.
“Pass-through of domestic factor costs, including wages and margins, into inflation has been subdued relative to the scale of the terms of trade shock,” she added.
“The evidence does not point to persistent cost-push inflation becoming embedded in wages and margins. Even after a year and a half of above-target inflation, there is little evidence for such cost-push inflation beyond what might be expected following an unprecedented terms of trade shock,” she added.