In her first speech in the new role, Sarah Breeden said while the UK economy was “moving in the right direction” to return inflation to the 2% target, the BoE’s job “is not done”.
With price rises slowing in the UK, as well as across the eurozone and in the US, financial markets have been pricing in cuts to interest rates in 2024.
But Breeden, who voted to hold rates at 5.25% at the December MPC meeting, said she was still deciding if they should rise from this level.
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“The question I am focused on is whether there is evidence of more persistent inflationary pressures which means we may need to tighten further,” she said.
Wage growth and employment trends will be key to helping her decide how to vote in upcoming MPC meetings, Breeden explained.
“I will be focused on signs that the loosening in the labour market is accelerating, and wage growth is falling more sharply than expected,” she said.
The growth in wages eased in the three months to September as vacancies fell, in signs the central bank’s interest rate hiking plan may be taking effect.
Regular pay, excluding bonuses, grew by 7.7% in July to September, according to data from the Office for National Statistics. This is down slightly on the previous periods, but is still among the highest annual growth rates since comparable records began in 2001.
However, Breeden sounded cautious notes that rates will stay higher for longer, even in the event no further rate hiking is needed, echoing previous comments from other members of the MPC such as Bank governor Andrew Bailey.
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She said: “Regardless, monetary policy still needs to be restrictive for an extended period of time to keep pushing down on inflation and to return it sustainably to target”.
The MPC’s ‘modal forecast’ from its November meeting, in which inflation slows to around 4% in the first quarter of 2024 and eases to 2% in the first quarter of 2025, before dipping to just below 2% at the start of 2026, is “more likely to occur”, Breeden said, than either a significant higher or lower inflation route.
But if higher inflation does occur, the Bank of England models that it could raise interest rates throughout 2024 to almost touch 7%, staying well above 6% beyond 2026.
UK inflation measure rose by 4.6% in the 12 months to October 2023, down from 6.7% in September. On a monthly basis, CPI did not change.
