BoE’s Mann sees risk of rising UK inflation

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The Bank of England (BoE) building is reflected in a sign, after the BoE became the first major global central bank to hike rates since the coronavirus disease (COVID-19) pandemic, London, Britain Brittany, December 16, 2021. REUTERS / Toby Melville

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  • Raising rates now could prevent bigger hikes later – Mann
  • The drop in demand could come too late to stop the rise in prices
  • BoE needs to focus on keeping price expectations anchored

LONDON, April 21 (Reuters) – Bank of England interest rates chief Catherine Mann said on Thursday that borrowing costs are likely to rise further as consumer demand is not expected to fall soon enough to prevent companies to impose price increases.

Mann was among a minority of BoE policymakers who voted for a half-percentage-point hike in interest rates in February, amid concern over rising inflation expectations. She voted for a quarter-point rate hike in March.

“The ratchet of domestic inflation…has been my main concern,” Mann, one of nine members of the Monetary Policy Committee, said in a speech.

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“We want to prevent inflation from getting out of control. And that may mean interest rates go up a bit,” she added in a later Q&A.

In the past, central bankers assumed they could largely ignore a one-time inflationary shock, like a spike in oil prices, Mann said.

But Britain has faced a series of shocks in recent years – starting with a fall in the pound due to the 2016 Brexit vote, followed by COVID-19 supply chain bottlenecks. 19 and now from soaring energy prices, intensified by the war in Ukraine.

The BoE needed to push back against any assumptions by companies that this was a normal situation, Mann said.

“Monetary policy needs to keep inflation expectations anchored; by doing so now, less tightening will be needed later, when demand may still be weak.”

BoE interest rates currently sit at 0.75% and financial markets expect them to hit 2.25% by the end of the year, although many economists believe that the increase will be less.

Britain’s inflation hit a 30-year high of 7% in March, and the BoE warned last month that a stronger-than-expected price recovery would squeeze economic growth later this year.

However, Mann said it was not clear to her that this drop in consumer demand would come soon enough to prompt companies to rein in future price increases.

“Monitoring these price expectations and forecast revisions is of paramount importance since inflation is ultimately driven by companies that are able to systematically raise their prices,” she said.

Moreover, the structure of UK regulated energy prices – which makes a further increase in electricity prices in October very likely – would prolong the period of high inflation.

On Tuesday, the International Monetary Fund predicted Britain would have the highest inflation of any major advanced economy next year, as well as the slowest growth.

Mann would not comment on the possibility of a recession as the central bank updated its forecast for its May meeting, but said some characteristics of stagflation already existed.

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Reporting by David Milliken; Editing by William Schomberg and Alex Richardson

Our standards: The Thomson Reuters Trust Principles.

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