A member of the Bank of England asserted Friday that the bank will have to continue raising interest rates in the face of persistent inflation, even if it burdens the faltering British economy and fuels the cost of living crisis.
“Whatever negative repercussions on the economy, the MPC must continue on its path and adopt a monetary policy consistent with its 2 percent inflation target,” Dave Ramsden said in a speech.
Britain has the highest inflation rate among the G7 countries, at around 10 percent. The Bank of England expects to rise above this limit in the fall and for several months.
The bank attributed the largest proportion of inflation to the war in Ukraine and the sharp rise in gas prices that resulted from it, but it expressed its fear that inflation would affect the rest of the economic sectors.
The new British government, since meeting in September, has presented a controversial budget: costly caps on energy prices but also deep tax cuts.
These measures are expected to reduce peak inflation in the short term, but by boosting purchasing power they might exacerbate it in the long term.
Ramsden indicated that investors in the derivatives market are betting that the rate of inflation in Britain will remain higher compared to the euro area and the United States for five years.
interest index
The Bank of England started raising its key interest rate index at the end of 2021 before the US Federal Reserve or the European Central Bank, but raised it only 0.5 percentage point in September, compared to 0.75 point for the Fed and European Central Bank.
Dave Ramsden is in the minority to defend an increase of 0.75 points.
“The MPC is well aware that our actions are adding to the current difficulties” by making borrowing more expensive, he said.
In addition, the government’s announcements caused a “shock” in the British market, according to Ramsden: the pound fell to a historic low once morest the dollar and the interest on long-term government bonds rose so much that the Bank of England had to intervene.
Ramsden argued that the Bank of England’s intervention in the bond market was not “a monetary-policy process: we bought bonds, but the process was, in my opinion, a way to buy time”.
On Thursday, John Cunliffe, another member of the Monetary Policy Committee, stressed that the measures were necessary to contain the shock in the bond market and prevent it from expanding, and causing “severe turmoil in the financing markets and thus causing general financial instability.”
(AFP)
