A senior Bank of England policymaker has said Britain’s battle against inflation remains incomplete, requiring interest rates to be kept at elevated levels for longer than expected in financial markets.
Pouring cold water on City predictions for a cut in rates in August, Jonathan Haskel said inflation was on course to return above the government’s 2% target.
“I would rather hold rates until there is more certainty that underlying inflationary pressures have subsided sustainably,” said Haskel, a member of the Bank’s monetary policy committee (MPC), in a speech at King’s College London on Monday.
While adding there were “encouraging signs” in the battle against fast-rising prices after a drop in the headline rate of consumer price inflation to 2% in May, he warned that the return to the official target set by the government would be temporary amid pressures from a tight jobs market.
“The playing out of those shocks through the economy, and the continued tight and impaired labour market, means that inflation will remain above target for quite some time,” he said.
Financial markets currently estimate there is a 60% chance the Bank will cut interest rates on 1 August for the first time since the Covid pandemic. While some members of the Bank’s nine-strong MPC have pushed for a cut in official borrowing costs over recent months, Haskel has voted to keep rates on hold.
The economist, who will complete his term on the MPC at the end of August, has previously expressed caution over cutting rates, as one of the more hawkish members of the rate-setting panel. The appointment of his successor will fall to the new chancellor, Rachel Reeves, as one of her first tasks in government.
In the first speech by one of the Bank’s policymakers since the general election, Haskel said the lingering impact from soaring energy prices after the Russian invasion of Ukraine had been “sufficient to impart momentum to current inflation”. UK inflation peaked at 11.1% in October 2022.
“The labour market continues to be tight, and I worry it is still impaired. I would rather hold rates until there is more certainty that underlying inflationary pressures have subsided sustainably,” he said.
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Rishi Sunak had argued before last week’s election that “difficult decisions” taken by his Conservative government had helped the economy “turn a corner”, making a pitch to the electorate that a vote for the Tories was a vote for lower interest rates.
The former prime minister called the general election in May after official figures confirmed inflation had dropped to 2.3% in April, amid hopes in Tory circles that the Bank would cut interest rates in June, before the ballot.
However, the central bank kept rates unchanged at 5.25% last month, having consistently warned that inflation was likely to rise later this year, amid pressure from rising prices in the service sector and resilient wage growth.
Having shifted his party to the economic centre, Keir Starmer argued that Labour would bring stability to policymaking after years of turmoil under the Conservatives and boost economic growth as a result.
