A Bank of England rate-setter told a Glasgow gathering that it would be better to skip interest rate cuts than gamble with economic uncertainties, which were becoming “more frequent”.
Megan Greene, a member of the Bank’s monetary policy committee, warned that “supply shocks” such as the Covid pandemic and the war in Ukraine were a constant danger.
She argued that the conventional wisdom that central banks should look through supply shocks needs to be reconsidered.
Traders believe that the Bank of England will leave the base rate on hold for the remainder of the year to squeeze persistent inflation out of the system. It stands at a 19-month high of 3.8 % and the Bank expects it to peak this month at 4%.
Speaking at Adam Smith Business School, Ms Greene said the world has entered an age when supply shocks are likely to be more frequent and severe, driven by factors like climate change and geopolitical tensions.
Such events have an impact on prices, she said, adding that weak productivity growth in the UK as well as rising unemployment both put pressure on inflation.
On the upside, she said these geopolitical tensions had “abated somewhat”, partly as a result of a “flurry of trade agreements”.
Ms Greene noted that the rise in UK inflation was in “stark contrast with our developed economy peers”, another reason to take a cautious approach to rate cuts.
Her comments came as the Bank’s governor Andrew Bailey said the path of interest rates was downward. Speaking in the West Midlands, he said any further cuts to interest rates would “depend on the path of inflation going down”. Sterling fell on his comments to $1.34.
source