Bank of England interest rate-setter warns inflation may get too low
Silvana Tenreyro has been one of the Monetary Policy Committee’s most consistently dovish members
Bank of England Monetary Policy Committee member Silvana Tenreyro has warned inflation is likely to get too low absent further action, despite the drastic pace of price rises at the moment.
The Consumer Price Index for February said inflation was 10.4 per cent, but in a speech today Tenreyro — one of the nine economists who set UK interest rates — noted the possibility of it falling below the 2 per cent target next year.
The Bank, like most major central banks, aims to keep inflation at around 2 per cent: a rate which economists believe ensures a level of certainty over prices while also keeping the economy stimulated.
“If inflation is too low, or negative, then some people may put off spending because they expect prices to fall,” the Bank notes in its explanation of the 2 per cent target.
However, with year-on-year price rises still in double-digits, most of the Monetary Policy Committee have aimed to bring the figure down by voting for a number of recent interest rate hikes.
Tenreyro and Swati Dhingra have been the two exceptions on the Committee. They have voted against every hike above 3 per cent, and for more gentle rises than the rest of the Committee before that.
In a speech today at the SES Annual Conference in Glasgow, Tenreyro explained the reasoning behind her votes. She said that most of the impact of earlier hikes had not yet filtered through to the wider economy.
When they do, she said, inflation could fall to “well below” the 2 per cent figure.
“As the effects of the large and rapid tightening in policy gradually come through over the course of 2023 and 2024, this is likely to drag demand well below its potential, loosening the labour market and pulling down on inflation,” Tenreyro said.
“In the absence of further counterbalancing cost-push shocks, I judge inflation is likely to fall well below target.
“Given that outlook, I have voted for no change in Bank Rate in recent months, rather than further tightening.”
She added that — in order to achieve stability in price rises — the Bank should lower rates either now or very quickly.
Tenreyro’s views on recent rate decisions are at odds with most of her fellow economists on the Monetary Policy Committee, who voted for the recent hikes.
Whether they wish to raise rates again is less clear, but analysts are leaning towards Tenreyro being outvoted again. According to financial data provider Refinitiv, City experts believe the odds of an increase at the next meeting are roughly two in three.
A pause at 4 per cent briefly looked like a possibility before last month’s meeting, but February’s shock 10.4 per cent inflation figure cemented the view of most of the Committee that the fight against inflation was far from over, prompting another increase to 4.25 per cent.
The Consumer Price Index for February said inflation was 10.4 per cent, but in a speech today Tenreyro — one of the nine economists who set UK interest rates — noted the possibility of it falling below the 2 per cent target next year.
The Bank, like most major central banks, aims to keep inflation at around 2 per cent: a rate which economists believe ensures a level of certainty over prices while also keeping the economy stimulated.
“If inflation is too low, or negative, then some people may put off spending because they expect prices to fall,” the Bank notes in its explanation of the 2 per cent target.
However, with year-on-year price rises still in double-digits, most of the Monetary Policy Committee have aimed to bring the figure down by voting for a number of recent interest rate hikes.
Tenreyro and Swati Dhingra have been the two exceptions on the Committee. They have voted against every hike above 3 per cent, and for more gentle rises than the rest of the Committee before that.
In a speech today at the SES Annual Conference in Glasgow, Tenreyro explained the reasoning behind her votes. She said that most of the impact of earlier hikes had not yet filtered through to the wider economy.
When they do, she said, inflation could fall to “well below” the 2 per cent figure.
“As the effects of the large and rapid tightening in policy gradually come through over the course of 2023 and 2024, this is likely to drag demand well below its potential, loosening the labour market and pulling down on inflation,” Tenreyro said.
“In the absence of further counterbalancing cost-push shocks, I judge inflation is likely to fall well below target.
“Given that outlook, I have voted for no change in Bank Rate in recent months, rather than further tightening.”
She added that — in order to achieve stability in price rises — the Bank should lower rates either now or very quickly.
Tenreyro’s views on recent rate decisions are at odds with most of her fellow economists on the Monetary Policy Committee, who voted for the recent hikes.
Whether they wish to raise rates again is less clear, but analysts are leaning towards Tenreyro being outvoted again. According to financial data provider Refinitiv, City experts believe the odds of an increase at the next meeting are roughly two in three.
A pause at 4 per cent briefly looked like a possibility before last month’s meeting, but February’s shock 10.4 per cent inflation figure cemented the view of most of the Committee that the fight against inflation was far from over, prompting another increase to 4.25 per cent.
