The Bank of England will have to continue to raise interest rates to control inflation despite sluggish growth, a senior Bank of England official said.
Sir Dave Ramsden, a member of the central bank’s monetary policy committee (MPC), said that dealing with the surge in prices was tricky in light of the gloomy outlook for growth, which had been lower than expected in the first quarter of the year.
Output rose by 0.8 per cent, buoyed by a strong start to the year after the lifting of Omicron restrictions. The economy shrank by 0.1 per cent in March after flatlining in February as households started to hold back on spending in the light of rising living costs.
Ramsden, who left the Treasury to join the MPC in 2017, said that low levels of unemployment and competition for workers could feed into more persistent price rises. Inflation, which hit 7 per cent in March, is expected to exceed 10 per cent in October when the energy price cap is lifted for the second time.
“Certainly on the basis of my current assessment of prospects, we’re not there yet in terms of how far monetary policy has to tighten,” Ramsden told Bloomberg News. “I’m still very, very supportive of the forward guidance that there may well need to be further tightening in the coming months.
“Given what we know about the UK labour market, I wouldn’t be surprised if it turned out to be a bit tighter . . . I think there are upside risks on inflation in the medium term.”
The war in Ukraine is casting a higher level of uncertainty on economic forecasts but the next meeting next month will be a chance to take stock, Ramsden said, adding: “I don’t think we’ve gone far enough yet on bank rate, but I do think that what we’ve already done is having an impact.”
He declined to comment on the markets’ expectation that interest rates will reach 2.5 per cent this time next year. Such a forecast would require six rate rises in the next eight meetings.
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Ramsden was in the majority who voted for a 0.25 percentage point rise in interest rates to a 13-year high of 1 per cent at the MPC’s meeting last week. Three members wanted to go further, raising rates by 0.5 points to 1.25 per cent.
The Bank became the first of the world’s big central banks to increase the cost of borrowing in December, when the committee voted to raise interest rates to 0.25 per cent from a historical low of 0.1 per cent.
Households and businesses should have confidence in the Bank’s ability to bring inflation back down to 2 per cent, Ramsden said, adding: “I can only imagine what it’s like for households at the moment, particularly at the lower end of the income distribution, in dealing with the increases in the price of food and energy.”
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Interest rates will need to keep rising, says Bank of England