Had the Bank of England’s Monetary Policy Committee (MPC) used more rapid policy tightening at last month’s meeting, inflation would have been brought back to its target in a sustainable way, a politician has said. .
In a speech today at the Securities Industry Conference, MPC member Dave Ramsden said this approach would also have avoided a costly and prolonged tightening later.
Ramsden was one of three committee members who voted for a steeper 0.75% increase in the Bank Rate, which would have raised it to 2.5% from its current level of 2.25 %. Such a rise was also widely expected by the markets.
Saying that rising energy costs were mainly responsible for the rise in inflation, Ramsden acknowledged that the government’s energy price guarantee would reduce a short-term spike, but said other support measures would add to the pressure.
He said he and the other two members who voted for a bigger rate hike “have already seen more persistent inflationary pressures” and said “medium-term measures of inflation expectations remain elevated.”
Ramsden said the MPC had yet to factor the government’s growth plan into its decisions, but said it would assess the impact on demand and inflation in time for its next meeting on November 2. .
He added: “Based on what we know so far, these impacts are likely to be material to the economic outlook over the next three years, which is also the relevant horizon for monetary policy.”
Ramsden said global financial markets had been “volatile” in recent months, with “notable increases in government bond yields, large movements in exchange rates and declines in prices of risky assets”.
He added: “Overall, the adjustment in market prices has been consistent with the tightening of monetary policy globally and the deterioration in the economic outlook.”
These trends were most pronounced in the UK market in August and in the run-up to September’s MPC meeting on September 23, and Ramsden said it had started to “really stand out” over the past two weeks.
He said this market “turbulence” was impacting the real economy, including borrowing costs. Highlighting the popularity of two-year fixed rates, Ramsden said swap rates that affect their pricing had risen from 0.5% last year to 4% last month and even 5.4% at the close. from the market yesterday. This is, however, less than the 6% seen over the past two weeks.
The Bank’s latest figures on quoted mortgage rates in September showed prices for two-year fixed rates had risen 50 basis points since August and were nearly 3% higher than a year earlier.
Ramsden said rates continued to rise in October.
Ramsden said the MPC would react forcefully if necessary, should the outlook point to further inflationary pressures.
He added: “I think the central question for all nine of us in the MPC is how forceful do we need to be to ensure that inflation returns to the 2% medium-term target in a sustainable way.
“These are very difficult times for the UK economy and millions of households and businesses are experiencing real hardship due to the cost of living crisis. At the MPC we are fully aware that for many our monetary policy actions add to the difficulties caused by the current situation.
Shekina is the business writer for Mortgage Solutions. She has over four years of experience in the B2B publishing market, with previous industries including accounting, pets, funerals, hospitality, retail and jewelry. She currently reports mortgage market news and liaises with financial clients to produce sponsored content. Follow her on Twitter at @ShekinaMS