The Bank of England (BoE) Needs More Evidence That Price Pressures Are Easing Before Cutting Interest Rates, a Policymaker Says - Latest Global News

The Bank of England (BoE) Needs More Evidence That Price Pressures Are Easing Before Cutting Interest Rates, a Policymaker Says

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A member of the Monetary Policy Committee said on Thursday that the Bank of England needs to see further signs that price pressures are easing before it starts cutting interest rates from their current 16-year high.

Megan Greene told a conference in London that the “persistence of inflation” had weakened since she joined the nine-member MPC last July, partly due to the “hawkish stance” of policymakers.

But while interest rates were clearly weighing on economic activity, it was still uncertain to what extent inflationary pressures would ease, she said.

“When considering how long we need to maintain our restrictive stance before policy should be eased, I think the burden of proof must be that inflation persistence continues to decline,” she told an audience at Make UK, the production company.

Greene was speaking ahead of next week’s release of key data that is likely to show that overall consumer price inflation fell back near the BoE’s 2 percent target in April – services prices, a better indicator of underlying inflation pressures, remain however, existence is increasing rapidly.

The MPC kept interest rates at a 16-year high of 5.25 percent at its meeting last week because it wanted to “see more evidence that inflation will remain low” before starting to ease monetary policy.

But two members of the committee wanted to cut interest rates, and Bank of England Governor Andrew Bailey signaled that other rate-setters were closer to voting for a cut – although they were divided over how soon it was likely to come.

Inflation, as measured by the consumer price index, was 3.2 percent in March, below its peak of 11.1 percent in 2022.

Greene said she “strongly supported” the MPC’s focus on labor market slack, wages and service prices as it sought to estimate how quickly inflation would fall sustainably toward the target.

But she argued that “two puzzles” in the labor market had made it more difficult to assess how long price pressures would last. First, unemployment remained low despite weak economic growth. Second, wages were still rising rapidly, at a pace that could not be fully explained.

Greene believes the root cause is that employers are “hoarding” workers, keeping more staff than they need, albeit with shorter hours, even during periods of weak demand.

That was one reason the labor market was so tight and workers were able to negotiate quick wage increases, driving up prices, she argued.

If things continue like this, monetary policy would have to be “more restrictive over a longer period of time” to bring inflation back to target, she said.

However, there was also a risk that companies would suddenly lay off large numbers of workers and unemployment would rise sharply if economic activity did not recover or they were unable to maintain profit margins.

“This would depress wages even further and lead to weakness in consumer prices. In this case, a looser monetary policy stance would be justified,” said Greene.

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