Interest rates: Bank of England hawks to ‘look through’ Budget’s disinflation
Bank of England policymakers struck a hawkish tone on the future path of interest rates despite acknowledging that the upcoming Budget would lower inflation.
Appearing before MPs on the Treasury Select Committee, Bank staff analysis agreed with the Office for Budget Responsibility (OBR) that measures in Rachel Reeves’ November statement would strip 0.5 percentage points off headline inflation through a “purely mechanical effect”.
The main measure contributing to lower inflation in the UK economy involves stripping green levies off household energy bills as well as a freeze to fuel duty and rail fares next year.
But Lombardelli said there were arguments to be made on whether rate-setters should “look through” the Budget measures and place greater weight on other factors.
Monetary Policy Committee (MPC) members’ comments came ahead of scheduled meetings where policymakers will decide whether to slash interest rates from its current level of four per cent at an upcoming decision on 18 December.
Markets have priced in a 25 basis point cut, though Oxford Economics analysts have suggested the decision could be a “closer call” than many expect given Governor Andrew Bailey could cast the deciding vote in another split decision.
Earlier in the hearing, Lombardelli struck a hawkish tone as she raised concern about high inflation expectations among consumers and businesses, which could push price growth higher than forecasts suggest.
“I worry more about the upside risks to inflation,” Lombardelli said. “I put more weight on the structural factors we are seeing – we are seeing pressure on resources in the economy.
“I am probably less convinced than others about how restrictive monetary policy is at the moment or how far we are from reaching the end of the cutting cycle.
“There is a question of what you do with [administered prices]. Economic theory will tell you to look through that.”
Lombardelli also suggested that there were also questions on impacts on inflation expectations to be examined.
External member Catherine Mann, who is also widely expected to vote for interest rates to be held at the next decision, said “inflation persistence” had been her main concern, adding that she was concerned administered prices across the public and private sectors would jump higher than forecast again from next April.
“From my standpoint, we have had behaviour changes associated with four years of inflation being above target consistent with two per cent,” Mann said.
She explained that behavioural effects could include firms refusing to reduce prices despite sales stalling or consumers still factoring in higher price growth into spending plans.
Mann also said that the labour market had not been as “dire” as some economists believed given employment in the public sector was “an important ingredient in offsetting some of the weakness in the private sector”.
Interest rate doves have their say
Deputy governor Dave Ramsden and external member Swati Dhingra, who both voted against consensus in November for a 25 basis point cut to interest rates, suggested that there had been more evidence that inflation was falling.
But Ramsden also said he didn’t “rule out that worry about persistence” given forecasts had underestimated wage growth levels.
As the deputy governor for markets and financial stability, Ramsden also answered Tory MPs’ questions on whether Budget leaks had rattled bond markets before Reeves’ fiscal statement.
Former ministers John Glen and Harriet Baldwin, who also hold prominent rules in Kemi Badenoch’s opposition team, grilled Ramsden on whether a Bloomberg report on 14 November suggesting forecasts had improved – a claim that has been questioned by OBR economist David Miles – had impacted trading.
Ramsden pushed back against questions as he said that volatility was a “fact of life” in markets and that the run-up to the Budget had been less shaky for markets than precedents set in past fiscal statements, according to the Bank’s research.
“It would be impossible to completely account for moves on any day,” he said.
Mann weighed in to say that the breadth of Budget speculation and its long duration, given the relative lateness of Reeves’ statement, had had a “detrimental” effect on consumer and business confidence.