The Bank of England raised interest rates to 1.25% last Thursday and said it was ready to take “coercive action” if necessary to deal with the threat of inflation. Photo: Reuters/Toby Melville
According to politician Catherine Mann, the Bank of England (BoE) should raise interest rates more aggressively to avoid a devaluation of the pound sterling (GBPUSD=X) against the dollar, which would push up inflation.
Speaking at the Market News International Connect event on Monday, Mann warned that the pound could come under near-term pressure if Threadneedle Street lags behind the Federal Reserve and European Central Bank on rate hikes.
She also argued that British inflation due to “strong employment, widespread bonuses as well as great wage increases, strong property prices” and state aid packages with accumulated savings during the pandemic would probably prove more than expected.
Continue reading: Interest rates: Higher UK inflation will trigger many rate hikes, BoE economist warns
Mann, an outside member of the Monetary Policy Committee (MPC), was part of a defeated minority of three who voted to raise interest rates by 50 basis points at last week’s meeting.
Six members voted for a quarter-point increase. The BOE move increased 0.75% against the Federal Reserve a day earlier.
“I voted for a 50 basis point hike at the last MPC meeting,” Mann said. “In my view, a more robust monetary policy move, both based on domestic composition and consistent with global factors, mitigates the risk of already underlying domestic inflation being further exacerbated by imported inflation from sterling depreciation. “
The central bank raised interest rates to 1.25% last Thursday and said it was ready to take “coercive action” if necessary to deal with the threat of inflation.
According to the bank’s revised forecast, consumer prices peaked at over 11% in October.
He said there were signs the rise in inflation, which hit a 40-year high of 9% in April, was getting deeper and more sustained, gaining momentum following government support measures for households.
Continue reading: Bank of England raises UK interest rates to 13-year high of 1.25%
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Citi’s former chief global economist insisted the impact of the Fed’s interest rate shock on the UK macroeconomy was “inflationary rather than deflationary”.
She argued that the BOE should forget the long-term economic impact of rate hikes for now and instead look at what they are doing for sterling.
Mann said: “It is well documented that global factors are disproportionately strong with the macroeconomic and financial conditions of the United States, the sheer size of the US economy, the external importance of the dollar as a reserve and accounting currency and the role of the United States. Government bonds as a safe haven. Even for these reasons, the Federal Reserve reigns over the meaning of politics.”
Image: Bank of England
He argued that tariffs could be increased for now, which would likely boost the pound and reduce inflation by making imports cheaper. The MPC member explained the outlook in the chart above, which suggests the pound could lose up to 8% in value over the next four years if the bank cuts rates.
Mann also pointed to the need to cut interest rates after the current monetary tightening cycle.
“I open the door to rate hikes in the medium term as domestic demand weakens and weakness in external demand sources breaks through,” she said. “In my view, this monetary policy favors a combination of inflation output better than historical response.”
See: How does inflation affect interest rates?