More rate hikes are on the way this year as the Bank of England continues to wrestle with a historic inflation crunch, a senior official at the monetary authority has said.
Sir Dave Ramsden, a member of the Bank’s monetary policy committee, told households to brace for higher borrowing costs despite new figures released today revealing the economy is reversing.
“I don’t think we’ve gone far enough yet on bank rate,” Ramsden said in an interview with Bloomberg News, adding that a succession of four rate rises are “having an impact” on easing inflation.
Threadneedle Street has lifted borrowing costs from a record low 0.1 per cent to a 13-year high of one per cent in just six months in response to prices accelerating seven per cent, the quickest pace since the early 1990s.
The Bank was the first major central bank to rein in accommodative policy. The US Federal Reserve is now expected to tighten rapidly this year by launching a cycle of 50 basis point rate hikes.
Higher interest rates tend to cool inflation by making it more attractive for households to save rather than spend and more expensive for businesses to borrow.
Weaker than expected UK economic growth has put the Bank in a bind. It faces a balancing act of taming inflation by tightening policy without delivering unnecessary damage to the economy.
Figures published by the Office for National Statistics today revealed the economy shrank 0.1 per cent in March, lower than analysts’ forecasts, sparking a raft of experts to warn Britain is dangerously close to tipping into a recession.
The National Institute of Economic and Social Research, who yesterday became one of the first top forecasters to bet the UK will fall into a technical recession (two successive quarters of contraction), said the data suggests the slump is closer than feared.
Ramsden warned inflation may climb above the Bank’s expected 10 per cent peak in October.
“Given what we know about the UK labour market, I wouldn’t be surprised if it turned out to be a bit tighter. . . I think there are upside risks on inflation in the medium term,” he said.
Treasury names Saunders’ MPC replacement
Dr Swati Dhingra is set to replace Michael Saunders as an external member of the Bank of England’s nine strong rate setting committee, the Treasury announced today.
She will take over this August from Saunders following his six year tenure on the monetary policy committee (MPC).
Governor Andrew Bailey said Dhingra’s “insights and perspective will be hugely beneficial to all of our discussions and we will benefit from her extensive research in international economics”.
Saunders has been “a great asset to the MPC,” Bailey added.
Dhingra, an associate professor of economics at the London School of Economics and an associate editor for the Journal of International Economics, said: “The work of the Committee is of great importance as the UK faces an exceptional cost of living crisis amid the global challenges of the pandemic and the war.”
The Treasury appoints people to the MPC.