Catherine Mann, a Bank of England policymaker, has expressed concern that the prolonged period of inflation above target could fuel future expectations of price increases.
Mann, speaking at the National Association for Business Economics annual meeting in Texas, said that a “aggressive approach” to combating inflation was necessary to prevent price pressures from becoming embedded.
Mann stated that “going forward, the duration of inflation and how long this exceeds target will be a very important factor in my decision making.” “As the duration of inflation exceeding target increases, medium-term expectations tend to drift.”
She said that the expectations of households and businesses regarding inflation were well-anchored. This meant they expected inflation to fall back towards the BOE’s target of 2% over the medium term.
Mann, one of four members of the nine-member Monetary Policy Committee of the BOE who wanted rates raised to 5.5% in December, said that she is still concerned about the persistent increases in cost of living. Mann stated that the longer inflation stays above target, the greater chance there is for expectations to “drift”.
Mann says that this could lead to workers demanding higher wages and creating a vicious circle. The BOE doesn’t expect inflation to return to its target rate until the second quarter 2025.
She said that the monetary policy needed to be “more aggressive” because it had to deal with both expectations and actual inflation.
Mann said that the “risks” of inflation becoming more embedded were the reason for her continuing calls to raise rates. This was despite the fact that the majority of MPC members in September preferred a pause on the rate-hiking cycles.
Mann stated that “if inflation stays above target for a longer period of time, it will require more policy actions for a longer period to get back to target. I would rather not do this because people start looking backwards.”
Mann stated that future inflation shocks would likely show an “upward trend,” meaning that a higher neutral interest rate is “a very probable outcome.”
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