Former policymakers at the Bank of England (BOE) have raised concerns that the central bank may need to pause its current cycle of interest rate cuts, despite Governor Andrew Bailey’s belief that a renewed inflationary surge is not a cause for concern. Bailey attributes the rise in inflation mainly to “temporary” factors, particularly energy costs, but former officials argue that more persistent price pressures could develop, and caution against further rate cuts.
Martin Weale, a former BOE policymaker, expressed concern that if inflation continues to rise in the coming months, the BOE may need to reconsider its rate-cutting path. He warned that rising wages and increasing business costs could result in a troubling second-round effect, with businesses raising prices to cover additional costs, especially with the national insurance increase and the rise in the minimum wage set to take effect on April 1.
DeAnne Julius, a former BOE rate-setter, emphasized the risk of cutting rates at this time, arguing that businesses are likely to raise prices to protect their margins, particularly as they face higher employment costs. Weale echoed this concern, pointing to adverse trends in wages, service prices, and core inflation, which could pose a risk to the stability of the economy.
The debate over inflation is further complicated by the BOE’s earlier misjudgment of post-COVID inflation, where they used the term “transitory” to describe the price surge, only to face a prolonged period of instability. Now, as inflation rises again, reaching 3% in January, economists are wary that the BOE may be underestimating the inflationary pressures in the months ahead.
Deutsche Bank forecasts that inflation could rise to 4.25% in the summer, and its UK chief economist, Sanjay Raja, suggests that this could push the BOE to delay its rate cuts. The BOE has already projected inflation will peak at 3.7% later this year, one percentage point higher than previously anticipated. While the BOE has followed a gradual rate-cutting approach since August, the possibility of further cuts remains uncertain as inflation continues to rise.
Despite the concerns, Governor Bailey has pointed to regulated prices, such as energy, as a major factor in the inflation rise. Additionally, signs of a cooling labor market may limit workers’ bargaining power, which could help reduce inflationary pressures. However, Bailey and Deputy Governor Dave Ramsden are aware of the risks, with Ramsden acknowledging stronger-than-expected wage growth and weak productivity as potential threats to economic stability.
Some former BOE policymakers, like Michael Saunders, believe inflation is likely to be temporary, driven by energy and food prices. Saunders, however, stressed that the central bank should not ignore inflation entirely but should take a measured approach, considering the broader economic context, including the sluggish domestic economy and weakening labor market.
In conclusion, while the BOE is committed to a careful approach to rate cuts, the debate over inflation’s persistence and the potential risks of further rate reductions remains a key concern among former policymakers and economists.
