(Bloomberg) -- Bank of England policy maker Swati Dhingra called on her colleagues to begin cutting interest rates to stop high borrowing costs from squeezing living standards.
Dhingra said that “the direction of various indicators has been very promising” and played down concerns about wage growth and services inflation.
“Now is the time to start normalizing so that we can then finally stop squeezing living standards the way we have been to try and get inflation down,” Dhingra said in an interview with the “Rest is Money” podcast released Monday. “We are weighing on living standards and that cost doesn’t need to be paid.”
She pointed to the sharp decline in producer inflation as a “harbinger” for consumer prices.
Dhingra is seen as the most dovish of the nine members on the Monetary Policy Committee and has been voting for rate reductions since February. Only one other rate-setter has since joined her call for lower borrowing costs — Deputy Governor Dave Ramsden.
Traders are betting on a 46% chance of a cut in August after the minutes from the June meeting said a decision not to reduce rates was “finely balanced” for some.
However, three rate-setters — Chief Economist Huw Pill, Catherine Mann and Jonathan Haskel — all came out to signal their reluctance to cut rates last week. A raft of data out this week, including inflation and labor market figures, may be crucial in swaying the votes of those seen to be considering an easing in policy.
Dhingra said that “demand is soft enough” to stop a resurgence in inflation despite wage growth and services inflation being above their “historical norms.”
She also said that borrowing costs should come down only slowly once the BOE starts to loosen policy, meaning it would take over a year to get rates back to around 3.5-3.75%.
“There’s merit in changing interest rates gradually for the reason that it gives people certainty of where things are going,” she said. “It lets us calibrate according to what the developments are, how the economy’s reacting.”
She said that investments in artificial intelligence and tackling climate change may have lifted the neutral level of interest rates compared to before the inflation shock. However, Dhingra cautioned that “beyond that, there’s not many compelling arguments” for the neutral rate — known by economists as r* — being permanently at higher levels.
“Having an idea of where that neutral rate would be, gives you very little guidance on how to set policy at this juncture,” she said. “If you look at how long it took for us to raise rates from where they were to where they are now at the end of the tightening cycle, that took about 14 meetings. So this is not something which is going to become an issue at this point in time.”
(Adds more comments from the interview.)
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