Further rises in UK interest rates could harm an already weakened economy and hard-pressed households, a Bank of England policymaker warned on Wednesday.
Swati Dhingra, one of nine members of the BoE’s rate-setting committee, said “overtightening” of interest rates posed more of a risk to the economy than home-grown inflation pressures, such as wage rises.
“Even after a year and a half of above-target inflation, there is little evidence for such cost-push inflation beyond what might be expected following an unprecedented terms of trade shock. Consumption remains weak and many of the tightening effects of monetary policy are yet to fully take hold,” she said in a speech to the Resolution Foundation thinktank.
Dhingra opposed last month’s increase in interest rates to 4% from 3.5% but she and fellow dove Silvana Tenreyro were outvoted by the other seven members of the Monetary Policy Committee.
The Bank is next scheduled to set interest rates on 23 March.
“Overtightening poses a more material risk at this point, through potential negative impacts from increased borrowing costs and reduced supply capacity going forwards.”
“It risks unnecessarily denting output at a time when the economy is weak and deepening the pain for households when budgets are already squeezed through energy and housing costs. Recent research indicates the persistent scarring effects of deep contractions associated with monetary policy tightening and energy market disruptions, indicating the harmful consequences of overtightening.”
“A prudent strategy would hold policy steady amidst growing signs external price pressures are easing, and be prepared to respond to developments in price evolution.”
The economist also said she believed that worries over domestic inflation pressures had been overexaggerated.
“Overall, the magnitude of domestically generated inflation is if anything likely to be smaller than we estimate,” she said.
Reporting by Frank Prenesti for Sharecast.com
