Bank rate-setter Catherine Mann warns of more rises13 Jan 2023 05:48
The UK economy may need a “significant recession” to contain future inflation expectations, a Bank of England rate-setter has said, warning that more monetary tightening is to come.
Catherine Mann, an external member of the monetary policy committee, warned that surveys showing household and businesses expectations for inflation to stay above target in the coming years would require aggressive monetary action that will put the brakes on economic growth.
Mann has been a consistently hawkish member of the committee over the past year, voting for an outsized 75 basis point rate rise at the Bank’s last meeting in November, when a majority of members voted for a 50 basis point increase.
A former chief economist of the Organisation of Economic Cooperation and Development, Mann said “a sizeable and larger number” of households and businesses think inflation in three years’ time will be around 4-5 per cent, higher than the Bank’s 2 per cent target rate. The Bank expects inflation to fall back below its target by late 2024.
“If [inflation expectations] drift . . . I am challenged. If I want to get back to 2 per cent, I have to have a significant recession because I have to get expectations down. The alternative is that I give up on the 2 per cent [target],” she told an audience at the Alliance Business School of Manchester University.
“The amount of drift in inflation expectations is a way of gauging how challenging it is for us to make adjustments in the economy to get to the 2 per cent objective in a no-recession situation. Getting expectations back under control, keeping them under control, is essential to avoiding this,” she said.
Central bankers use inflation expectations to judge how credible their commitment to keeping inflation stable and low is among investors and the public. Mann said gradually higher expectations “keep me up at night”.
The Bank has raised rates from close to 0 per cent at the end of 2021 to 3.5 per cent in December, the highest since 2008. Mann said that more rate rises were likely this year, with data on inflation showing “we are not there yet”.
Investors are split over the probability of a 50 or 25 basis point rate rise from the MPC at its meeting in February. The Bank has previously warned that markets were over-estimating how far it will tighten policy in the face of a slowing economy.
Forecasts from the Bank and the Office for Budget Responsibility expect the UK to enter a year-long recession at the end of 2022, comparable to the downturn of the early 1990s.
Mann warned that the level of inflationary pressures this year would depend on how far companies were willing to keep on raising their prices, rather than rising wages.
https://www.thetimes.co.uk/article/bank-rate-setter-catherine-mann-warns-of-more-rises-gj6cxrpxw
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