BOE’s Mann Warns UK May Have Cut Interest Rates Prematurely
(Bloomberg) -- Bank of England rate-setter Catherine Mann warned that the UK may have prematurely cut interest rates if there have been lasting shifts in wage and price setting.
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The cooling in services inflation still has “a long way to go” despite slipping to the lowest level in over two years last month, Mann said on Thursday at a Reinventing Bretton Woods Committee event in Washington.
“If you have structural persistence in the relationship between wages and price formation that lasts, that is persistent and embedded, then it’s premature to start cutting until you purge those behaviors,” she said.
The remarks suggest Mann — who opposed the BOE’s first interest rate reduction in over four years in August — remains wary of backing more cuts, despite markets expecting the bank to lower them further next month. Mann is the most hawkish policymaker on the BOE’s Monetary Policy Committee, and was one of four members to oppose the quarter-point cut to 5%.
Her comments contrasted with those of Governor Andrew Bailey who on Wednesday said that inflation has cooled faster than officials had anticipated.
Mann warned that the recent easing in price pressures may not keep inflation at the UK central bank’s 2% target in the medium term.
“In order to get to a target-consistent 2% inflation rate, services still have a long way to go,” she said. “They need to get to about 3%.”
Mann also said that the behavior of consumers will be the “linchpin” for UK growth, warning that the middles classes have been particularly “scarred” by so-called fiscal drag as inflation pushed people into higher tax bands after the former Conservative government froze the thresholds.
Speculation has mounted in the British press that the new Labour government may extend the freeze on personal tax thresholds at the budget next week to help fill a fiscal black hole. Mann said the existing fiscal drag has been an “important ingredient in the slowdown in the economy.”
The middle classes “have been exposed to a relatively greater degree to tax bracket creep,” she said. “That’s an important consideration for purchasing power in the current environment but also going forward.”
Still, Mann said interest rates will likely settle at higher levels than those seen before the pandemic, warning that there will be “a lot more inflation” going forward due to supply shocks against a backdrop of labor market frictions.