An early hike in interest rates would be “self defeating” if inflationary pressures turn out to be temporary, according to a member of the Bank of England’s monetary policy committee.
Silvana Tenreyro, one of the central bank’s nine rate-setters, said policymakers should wait and see how much the price of oil, gas and semiconductors continued to increase before they began pushing up borrowing costs from 0.1%.
In a message that will be seen as a swipe at more hawkish members of the monetary policy committee (MPC), who have signalled a willingness to raise borrowing costs, the former London School of Economics professor told BusinessLive Wales it was too early while the recovery remained uncertain.
Last week the Bank’s governor, Andrew Bailey, said he was concerned about inflation running above the central bank’s 2% target and the “very damaging” effect if consumers and businesses believed it had become permanently elevated.
Tenreyro’s fellow MPC member Michael Saunders said it was appropriate that financial markets were focused on a rate rise before Christmas, adding to speculation Threadneedle Street might become the first leading central bank to raise rates since the pandemic struck.
But on a virtual trip to Wales, Tenreyro poured cold water on the idea of an early rate hike, arguing that the current level of inflation was being measured against low prices last year in the aftermath of the first lockdown.
She said large increases in the global price of energy and other commodities were also pushing up inflation, “but these effects in general tend to be short-lived”.
Tenreyro said: “The prices go up, but they don’t keet going up sustainably, so you have a one-off price effect and in that sense inflation should be transitory. So if they are not repeated they drop out of the inflation calculation after a year.
“Typically, for short-lived effects on inflation, such as the big rises in the prices of semiconductors or energy, it would be self-defeating to try to respond to their direct effects.
“By the time interest rates were having a major effect on inflation the effects of energy prices would already be dropping out of the inflation calculation. If some effects were to prove more persistent it would be important to balance the risks from a period of above target inflation with the cost of weaker demand.”
Bank officials are concerned that a long period of above-target inflation could trigger a round of pay rises that force companies to put up prices of goods and services further. She said the labour market, with a falling unemployment level but record vacancies, was being closely monitored by the MPC.
“It is interesting what is going on in the labour market and this is one of the biggest uncertainties that we are facing now as a committee and we need to try and work out what is going on. There were many people on furlough. This is a significant and sizeable labour supply that can potentially enter into the market now,” she said.
“The question is whether they will become unemployed or whether they will withdraw from the labour force. Even there if you think about people who have left the labour force and count now as inactive, they can be drawn back if there are jobs and unemployment is sufficiently low and wage growth is sufficiently attractive for them to go back. So, they shouldn’t be written off as they can brought back.”