Tax rises and spending cuts announced in the UK government’s Autumn Statement were unlikely to persuade the Bank of England to moderate future interest rate rises, the central bank’s deputy governor said on Thursday.
Speaking to the first BoE watchers conference at King’s College London, Sir Dave Ramsden seemed to undermine the contention of chancellor Jeremy Hunt, who said in his statement that the government’s £55bn of budgetary consolidation would allow interest rates to be “significantly lower”.
Ramsden said the measures to reduce public borrowing would take effect too late to influence BoE monetary policy in the months ahead.
The vast majority of the measures unveiled by Hunt, “do not come into effect until April 2025 so will have very little effect over the Monetary Policy Committee’s three-year forecast horizon, relative to what was assumed in the November monetary policy report”, he told the conference.
The BoE had previously said it would reconsider its plans for interest rates if the government imposed measures in the statement that changed the picture for the economy immediately, deepening the economic downturn and putting downward pressure on inflation.
Ramsden said he thought the BoE still needed to tighten monetary policy. “I expect that further increases in the bank rate are going to be required to ensure a sustainable return of inflation to target,” he said.
The deputy governor made it clear he would consider another large interest rate rise at the next meeting in mid-December if he saw that companies still felt able to raise prices to defend profit margins and increase wages significantly higher than the 2 per cent inflation target.
“If the outlook suggests more persistent inflationary pressures then I will continue to vote to respond forcefully,” Ramsden told delegates.
The BoE raised interest rates by 0.5 percentage points in August and September and by 0.75 percentage points this month, taking the official rate up to 3 per cent, its highest since 2008.
Ramsden noted that although his bias was “towards further tightening”, he would “consider the case for reducing the bank rate” if the economy developed differently to his expectations and persistent inflation stopped being a concern.
At its last meeting the MPC signalled that if inflation began to shrink, which is expected as the UK enters recession, it would not need to raise rates much further to bring inflation down to its 2 per cent target.
But this was criticised on Thursday evening in a speech in Italy by Lord Mervyn King, former governor of the bank. King said “intellectual errors” by central banks had led to inflation hitting double digits around the world, and that because officials had printed too much money during the pandemic it had become inflationary.
King said the most likely mistake that policymakers would now make would be not to raise interest rates high enough as inflation begins to fall in 2023.
“A premature end to the monetary squeeze needed to bring core inflation down would result in a more prolonged recession than is necessary. But political pressures on central banks will push them in that direction,” he predicted.
Catherine Mann, an external member of the MPC, agreed with the former governor that not raising interest rates fast enough last year might have been a policy mistake. But she said she had always voted for tighter policy since joining the committee in September 2021. “So, if there was a policy mistake, it’s not my fault,” she added.
Financial markets still expect the BoE’s rate to rise to 4.5 per cent next year.
The BoE watchers conference, held for the first time this year, is a UK version of the long-running “ECB and Its Watchers” annual event in Frankfurt. It brings together policymakers, market economists and academics to discuss monetary and financial policy.