The Bank of England should adopt a more activist approach to setting interest rates in order to deal with the “substantial volatility” affecting geopolitics and financial markets, a rate-setter has said.
Catherine Mann, an external member of the Bank’s Monetary Policy Committee (MPC), argued that rate-setters should be more willing to vote for more radical shifts to monetary policy if its to keep inflation anchored at its two per cent target in the near future.
Speaking to the Reserve Bank of New Zealand, she said: “International spillovers have dominated the signals from UK domestic data and monetary policy actions.
“With substantial volatility coming from financial markets, especially from cross-border spillovers, the founding premise for a gradualist approach to monetary policy is no longer valid.”
At its most recent interest rate vote, the MPC voted to cut the Bank Rate – the UK’s main interest rate which influences almost all other lending in the UK economy – by 25 basis points despite inflation having ticked up to three per cent a few days earlier.
But Mann shocked central bank watchers when she voted for a bumper 50 basis point rate cut having been one of the MPC’s most hawkish members in previous votes. The move was an attempt to “cut through the noise” and send a signal to markets, she previously said.
And in her speech on Thursday she further outlined the rationale behind her decision, saying that while short-term data justified holding rates, longer-term, leading indicators – like the labour market and future consumption – pointed to the need for a hefty 0.5 per cent cut.
“I need to look six to nine months ahead for sources of inflationary pressures,” she said. “Incoming data evidences more extensive weakness in market sector output and consumer demand.”
Mann added that sluggish consumer demand will be a downward force on inflation despite cost pressures being faced by firms. Upcoming policy changes like the hike to employer national insurance contributions and an above-inflation rise to minimum wage in April have led some economists to predict an unwelcome return to steeper price rises.
Recent price shocks to energy and food will also lead to “near-term inflation hump”, she said. But even with all this and the prospect of inflationary tariffs adding barriers to trade, the Bank of England rate-setter argued that weak consumption readings meant firms are “likely to have to absorb the inflation hump rather than pass it through hat is the evidence”.
“These judgements are the rationale for a Bank Rate cut and time will tell whether they are borne out,” she added.
