Bank of England raises interest rates to 4%

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Interest rates could be hiked again despite early signs of a “turning point” in the battle against sky-high inflation, a Bank of England rate setter has warned. Catherine Mann said it was too soon to put the brakes on rate rises, warning that there are still big risks that inflation may prove stubborn.

Her assessment puts her at odds with the Bank of England’s chief economist Huw Pill who says rate rises should be paused so that borrowing costs aren’t pushed up too high.

Ms Mann, one of the Monetary Policy Committee’s most consistently hawkish rate-setters, said inflation was likely to remain higher than the Bank expects based on surveys of businesses and household inflation expectations.

“We need to stay the course, and in my view the next step in the Bank rate is still more likely to be another hike than a cut or hold”, she said in a speech in Budapest, Hungary.

However, many leading economists say the inflation peak has now passed after the latest figures showed it had plunged to 10.5 percent in December – the second month in a row it has fallen.

It means prices are still rising but at a slower rate.

The slowdown is good news for stretched households with the cost of fuel now dropping as well as the cost of clothes.

Inflation was 10.7 percent in November, down from its eye-watering peak of 11.1 percent the previous month, with the downward trend forecast to speed up through 2023.

Bank of England boss Andrew Bailey has said he expects inflation to drop “rapidly” this year as energy prices fall and there has already been a “turning of the corner”.

The Bank, which raised interest rates to four percent last week, is treading a tightrope of trying to cool inflation without stifling the economy.

Following the rate rise the Bank also upgraded its economic outlook for the UK, predicting that an expected recession will be shorter and shallower than previously thought.

But Ms Mann, who was one of the seven Monetary Policy Committee (MPC) members who voted to raise rates, said she still sees “material upside risks to our inflation outlook” and warned over being “complacent about inflation”.

She said: “If there is uncertainty about the degree of inflation persistence, it is better to assume a high degree because the costs of making a mistake if the true inflation process is more persistent are larger than if the true inflation process is less persistent.”

She said not all the underlying measures of inflation are easing back, adding that before halting rate hikes, she would want to see “a significant and sustained deceleration in higher frequency price increases and in the underlying inflation measures and expectations towards inflation rates that are consistent with achieving the two percent target”.

“The moderation of inflation this year has to be as rapid and complete on the downside as its ratchet-up was last year,” she added.

Pausing rate hikes only to have to resume with increases, later on, would be just as damaging to inflation expectations, she cautioned.

“Why not wait, that is pause the hiking cycle, to see if the inflation dynamics are what I think they are?

“If inflation indeed is more persistent, then Bank Rate will need to rise again after the pause, to be followed later with reversal.

“In my view, a tighten-stop-tighten-loosen policy boogie looks too much like fine-tuning to be good monetary policy.

“It is both hard to communicate and to transmit through markets to the real economy.”

Mr Pill last week said it is important the Bank does not do “too much”, despite recognising that UK inflation was “much too high”.

The economist said: “We have to recognise we have done a lot with monetary policy already.

“Interest rates have risen by almost 400 basis points (four percentage points).

“It’s also important that we guard against the possibility of doing too much.”

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