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A Bank of England rate-setter has said she will not vote to cut the cost of borrowing before seeing more evidence that inflation is returning to the central bank’s target.
Megan Greene said on Thursday that while it was clear that UK monetary policy was already limiting demand, “in light of the persistence of UK wage and services price pressures . . . I think policy will need to remain restrictive for some time for inflation to sustainably return” to 2 per cent from 4 per cent now.
Greene — who until this month voted to raise interest rates — is the latest policymaker to push back against financial markets’ expectations of early cuts to the cost of borrowing, which stands at 5.25 per cent.
BoE governor Andrew Bailey this month said the central bank had seen “good news on inflation over the past few months” but needed “more evidence that inflation is set to fall all the way to the 2 per cent target, and stay there, before we can lower interest rates”.
Greene told an audience at rating agency Fitch Ratings in London that recent signs of inflation persistence starting to ease were “encouraging”, and that she judged the MPC’s stance to be sufficiently restrictive to return price growth to 2 per cent in the medium term.
But she added: “I would need to see further evidence that inflation persistence is less embedded than previously feared before I would consider voting to loosen policy.”
Greene, who was appointed to the Monetary Policy Committee last July, voted to keep rates at 5.25 per cent this month. She had previously advocated higher rates, and broke with fellow external members Catherine Mann and Jonathan Haskel who backed a quarter-point increase.
Official data published on Thursday showed that the UK economy entered a technical recession in the final quarter of last year, contracting more than expected by 0.3 per cent.
The figures have bolstered traders’ expectations of interest rate cuts. Markets are pricing that the BoE will start cutting its benchmark rate in June, taking it to 4.5 per cent by the end of the year.
Greene said that while the market-implied path for interest rates in the UK and the US was similar, “UK inflation is stickier than that in the US and this may not be reflected in the market pricing of rate paths”.
Last month, UK inflation was unchanged at 4 per cent, higher than 3.1 per cent in the US and 2.8 per cent in the eurozone.
She noted that price growth was above target in all three economies because of the persistence of services inflation, which is closely watched by policymakers, but that “the issue may be of greater concern in the UK”.
UK services inflation last month rose to 6.5 per cent from 6.4 per cent in December. In the same period, it dropped from 5 per cent to 4.9 per cent in the US and was unchanged at 4 per cent in the eurozone.
Greene said the uptick in the UK was in part the result of faster wage growth, adding: “When it comes to pay growth, the UK stands out.”
Greene’s remarks echo comments last week by Mann, who said the UK was set to lag behind its peers in returning inflation to target and argued for rates to rise further.
