A Bank of England policymaker says interest rates should fall sharply because inflation is set to tumble. Silvana Tenreyro opposed last month’s rise to 4.25 percent, made to help lower inflation of 10.1 percent. But Ms Tenreyro, one of the “doves” on the rate-setting Monetary Policy Committee, believes holding rates too high could even push inflation below the two percent target.
She told a conference in Glasgow, the main causes of inflation were the war in Ukraine driving up energy costs and post-Covid
supply-chain issues.
Ms Tenreyro expects inflation to start falling sharply due to cheaper energy, a cooling jobs market and the Bank’s rate rises.
She said: “With the bank rate moving further into restrictive territory, I think a looser (monetary policy) stance is needed to meet the inflation target medium term. I expect the bank rate will require an earlier and faster reversal to avoid a significant inflation undershoot.”
Ms Tenreyro is one of the two members of the MPC that voted to keep rates on hold in March, while the other seven voted to raise the base rate by a quarter point.
The EY ITEM Club think tank, which uses the Treasury’s economic models to make its forecasts, agreed.
Its chief economic adviser Martin Beck said: “There is no need to raise rates, there is actually a case for cutting them in the not-too-distant future. Lower energy prices, which feed into everything, will send inflation down.”
But Huw Pill, chief economist at the Bank, said that while the effects of previous rate hikes are still to be fully felt, the focus had to be cut inflation.
In his view, inflation was “unacceptably high” and he added: “The onus remains on ensuring enough monetary tightening is delivered to sustainably return inflation to target.
“Although inflation is set to fall significantly caution is still needed in assessing inflation prospects.”
He said that with energy prices still well above pre-pandemic levels, there is a chance inflation will resist efforts to get it back to target.
However, he said the Bank needs to be ready to cut rates quickly, if there is a shock to the financial system.
Last month markets were spooked by the collapse of America’s Silicon Valley Bank, as well as the emergency rescue of investment banking giant Credit Suisse.
Michael Hewson, CMC Markets’ chief market analyst said the odds are against rates being held or cut, which is supporting sterling’s value.
But Julian Jessop IEA Economics Fellow, said: “Silvana Tenreyro is right to warn that the full impact of last year’s increases in interest rates have yet to be felt and that a rapid fall in inflation could open the door for cuts.
“Indeed, the markets are already speculating about when the first cut might come.
“But with inflation still way above target, and interest rates only just back at more normal levels, this seems premature. It will probably be a long while before a majority of the Monetary Policy Committee is ready to cut rates again.”
