Bank of England rate setter argues for interest rate cuts as inflation drivers ease

The Bank of England may soon have scope for fresh interest rate cuts as the main forces behind Britains sustained inflation begin to recede according to Swati Dhingra a rate setter on the Bank’s Monetary Policy Committee Writing in The Times Dhingra contends that restrictive monetary policy now risks doing more harm to the economy than good as the unique factors behind the UKs inflationary surge are expected to subside

Dhingra a London School of Economics trade economist observed that the uptick in UK inflation relative to Europe is primarily the result of administered prices and global commodity shocks The Bank’s approach should factor in the likelihood that these effects will fade allowing a less cautious stance on rate reductions Policymakers need not fear that rate cuts would undermine their inflation target as these external pressures are forecast to diminish over the coming months

The Organisation for Economic Cooperation and Development predicts that the UK will experience the highest rate of inflation within the G20 this year, raising its estimate for annual price increases to 35 per cent The Bank of England has already reduced the base rate from a peak of 525 per cent to 4 per cent across five rounds of cuts in the past year yet inflation remains stubbornly above the two per cent target and reached four per cent in September

Despite a backdrop of robust wage growth Dhingra downplays its role in services inflation Wage bills accounted for 61 per cent of price growth in market driven services sectors in the past year but administered services such as bus fares and water bills only saw 27 per cent of their price growth from wage components These areas dominated by state or regulatory control are less responsive to higher interest rates compared with competitive markets

Food price inflation rose to 51 per cent this year exacerbating the cost of living crisis for lower income households Dhingra highlights products such as chocolate which weigh heavily in the UKs inflation basket as contributors to recent elevated levels Yet she notes that food price inflation trends in Britain are not more acute than elsewhere in Europe

Divisions within the Banks Monetary Policy Committee have grown sharper Dhingra dissented from the majority view this month urging a further rate cut to 375 per cent while some members advocated caution as inflation remains sticky Her evidence suggests that the window for further support to business and the broader economy could soon open as domestic and global inflationary pressures abate