Interest rates may have to start falling again if pressures on the cost of living ease faster than the Bank of England expects, a Threadneedle Street politician has said.
Dave Ramsden, one of the bank’s deputy governors, said he currently supports further increases in the cost of borrowing, but raised the possibility that a weaker economy will require a reduction.
“Given the uncertainties we face, it is also important to be humble about what we don’t know or have yet to learn. I favor a vigilant and reactive approach to setting policy,” Ramsden said.
“While my bias is in favor of further tightening, if the economy develops differently from my expectations and inflation persistence ceases to be a concern, then I would consider the possibility of a rate cut. discount, if any.”
Ramsden’s comments came as the latest CBI manufacturing snapshot predicted UK factories would face a tough winter.
The employers’ lobby group said it expected any increase in production in the three months to be short-lived as domestic and export order books were below normal for the time of year.
Anna Leach, CBI Deputy Chief Economist, said: “The rise in manufacturing output this month appears to be at least partly due to improved supply chains, with several companies saying they have been able to Fulfill orders as materials and components became more readily available.
“Total order books, however, remained much lower than at the start of the year, and production is expected to decline further in the next quarter.”
Threadneedle Street’s Monetary Policy Committee (MPC) has steadily raised interest rates since last December, from a record high of 0.1% to 3%, and financial markets are now pricing borrowing costs officials will peak at 4.5%.
As Ramsden signaled he would vote for a rate hike when the MPC meets again next month, he became the latest committee member to highlight the risks that too much policy tightening could lead to a deep recession.
At the November meeting, only seven of nine MPC members backed a 0.75 percentage point increase, with Silvana Tenreyro and Swati Dhingra voting for smaller increases.
Ramsden said: “I am not yet convinced that the inflationary pressures generated domestically by rising costs and corporate pricing pressures are starting to ease. Encouragingly, survey-based and market-based medium-term inflation expectations have retreated from their peak, although they remain elevated.
“Assuming that in the short term, the economy is moving broadly in line with the last RPM [monetary policy report] projections and given my assessment of the balance of risks, I expect that further increases in the Bank Rate will be necessary to ensure a sustained return of inflation to target.
“Considerable uncertainty remains around the outlook and if the outlook suggests more lingering inflationary pressures, then I will continue to vote to react strongly.”
Signs that the US Federal Reserve plans to slow the pace of interest rate hikes next month weakened the dollar and pushed the pound above $1.20 on Thursday, its highest level in three months.