Bank of England could be closed to cutting rates as inflation eases says deputy governor

Bank of England could be closed to cutting rates as inflation eases says deputy governor
Bank of England could be closed to cutting rates as inflation eases says deputy governor

The Bank of England may be ready to cut interest rates this summer if its Monetary Policy Committee’s forecasts of easing inflation are bound out, a top official has said.

Ben Broadbent, a BoE deputy governor, said in a speech that the bank’s agents around the country were reporting that companies feel less able to pass higher wages through to their customers than last year.

“Whatever the priors of its individual members the MPC will continue to learn from the incoming data,” he said. “If things continue to evolve with its forecasts — forecasts that suggest policy will have to become less restrictive at some point — then it’s possible Bank Rate could be cut some time over the summer.”

Broadbent was speaking ahead of inflation figures on Wednesday that are expected to show a sharp drop in consumer price inflation to about the 2 per cent target level after a slide in energy prices. The MPC this month signaled rate reductions were on the cards soon as it predicted inflation would fall to just below 2 per cent in two years’ time, and to 1.6 per cent in 2027.

In his speech on Tuesday, Broadbent said the direct inflationary effects of the pandemic and war in Ukraine had now “faded” and the UK was left with the more persistent, “second-round” effects of that surge.

How long these take to fade is a key question confronting the MPC, and members of the committee differ sharply on the prognosis. The second-round effects of the surge on wages and prices probably peaked last autumn, Broadbent said, but he predicted they would take longer to unwind than they did to emerge.

However, Broadbent highlighted intelligence from the BoE’s network of agents that suggested companies were struggling to pass on their higher costs and wages to consumers, which could point to less persistent inflation.

In April, the S&P Global monthly survey of purchasing managers reported that in the services sector, businesses reported the fastest increase in input costs since August 2023, driven by higher wages on the back of the rise in the national living wage. But prices charged by service sector companies rose at the slowest pace for three years, according to the survey.

Broadbent noted that there was a “range of views” on the MPC as to the persistence of the second-round effects, but that he had been happy to reduce his estimate of how stubborn they would be for the third year of the BoE’s latest economics forecast.

Like other central bankers, Broadbent warned that the UK had been buffeted by a series of “extremely large, internationally common shocks”, which created volatility and made it harder for the BoE to deliver accurate forecasts.

These shocks, he argued, were like the “unhappy families” referred to in Leo Tolstoy’s Anna Karenina. No two supply-side disturbances have identical effects, he argued, and that makes their consequences harder to discern or to predict.

“Hand-in-hand with greater volatility and uncertainty go larger forecast misses,” he said. “These are uncomfortable but if the world is genuinely a noisier place, they’re also inevitable.”

This strengthened the arguments for the UK to keep an operationally independent central bank that can take tough decisions in such adverse circumstances, said Broadbent, which is due to withdraw from the BoE next month.

“It’s when. . . inflationary pressure is rising even in an environment of weaker economic growth that policy is really tested.”

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