(Bloomberg) -- Bank of England policymaker Catherine Mann said she would prefer to keep rates higher for longer and then cut more aggressively when it is clear inflation risks are receding.
She warned that market bets on the US Federal Reserve rapidly reducing interest rates have major spillover effects for the UK that are a “material input” to her cautious stance on easing policy.
The UK central bank’s most hawkish policy maker laid out the case for resisting going fast rate on rate cuts after the Fed backed an outsized half-point reduction on Wednesday.
It was followed a day later by a more wary tone on future cuts by the BOE. The Monetary Policy Committee voted 8-1 for no change after lowering rates for the first time since the pandemic in August. While headline inflation in the UK is close to the BOE’s 2% target, there are worries over elevated wage growth and services prices lingering.
“A risk management assessment implies that it is better, under inflation uncertainty, to remain restrictive for longer, until right tail risks to the inflation process dissipate, and then to cut more aggressively,” Mann said in the text of the speech delivered at a conference in Lithuania.
“Therefore, while agreeing with the majority for a hold at the meeting just concluded, I have a guarded view on initiating a cutting cycle,” she added.
Mann offered an explanation for why she backed holding rates at 5% in September having opposed the cut from 5.25% the previous month.
Mann revealed that she contemplated supporting a reduction last month amid evidence of growing pressure on consumers from housing costs. If she had voted to hike this month, only to later back easier policy, then “this would be the ‘boogie-dance’” with rates that she opposes, she said.
Mann said structural factors such as wage bargaining, product prices and spillover effects from other major economies may stop the BOE keeping inflation low “without maintaining a restrictive monetary stance for longer.”
One concern is that the UK will be affected by any rush to loosen monetary policy in the US amid signs that the world’s largest economy is softening. Currently traders are expecting a quicker cutting cycle by the Fed than the BOE, raising the risk of an easing of financial conditions in the US that spills over to the UK through markets and trade.
“As a small open economy, the macroeconomic and monetary conditions of the UK’s largest trading partners matter significantly for the domestic outlook,” Mann said.
Mann also warned that she believes the neutral interest rate is higher than the BOE’s models imply and that, as a result, policy is less restrictive today with bank rate at 5% than the MPC thinks.
“It is plausible that the terminal rate applicable for the monetary policy horizon has risen, implying that monetary policy has been less restrictive than is presumed by our models,” she added.
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