Bank of England policymaker Catherine Mann on Friday indicated that more rate hikes were needed in the coming months, saying current price and wage expectations were “inconsistent with the central bank’s 2% inflation target”.
“At the beginning of 2022, the current price and wage expectations come from the monthly decision-maker panel [a monthly business survey] are inconsistent with the 2 percent target and, if realized in 2022, should keep inflation higher for longer,” Mann said.
Speaking to the Official Monetary and Financial Institutions Forum, a central bank think tank, she told delegates that monetary policy “needs to dampen expectations of wage and price increases for 2022 to prevent them from becoming embedded in corporate decision-making become and consumer”.
Andrew Goodwin, economist at Oxford Economics, said the speech carried “a clear message that multiple rate hikes are on the horizon”.
Presenting the latest data, Mann noted that not only had companies raised prices more than they did before the coronavirus pandemic last year, but that they plan to make similarly large increases in the coming months.
“There should be concern that 2021 costs are reflected in price expectations for 2022,” she said, adding, “Changing expectations is the first line of defense against strengthening wage-price dynamics.”
“In my view, the aim of monetary policy now should be to lean against this ‘longer-strong’ scenario,” she said, hinting at rate hikes.
Many economists expect the BoE to hike rates to 0.5 percent on February 3 after raising rates to 0.25 percent in December for the first time in more than three years. Mann was among the members of the Monetary Policy Committee who supported the rise. At the time, the central bank warned that further “modest tightening” would likely be needed to reach the 2 percent inflation target.
Other central banks consider tightening monetary policy if inflation rises. The US Federal Reserve has kept interest rates at record lows but warned it may have to raise rates sooner and faster than expected. However, the European Central Bank said in December that it was “very unlikely” to hike interest rates this year.
Britain’s Office for National Statistics reported on Wednesday that UK inflation rose to a 30-year high of 5.4 percent, with many economists predicting it will peak in April and above the BoE’s latest estimate of 6 percent will be.
Mann said the inflation spike in 2021 was initially seen as temporary, but has “morphed into broader product categories and into labor markets,” with all measures of underlying inflation well above the MPC’s target.
She pointed out that monetary tightening is not aimed at increasing pressure on the cost of living in the UK, but rather the opposite. “My goal is to bring inflation back to target so workers can reap real wage gains from their jobs,” she said.
But Goodwin said her “idea that increasing that pressure now will result in consumers suffering less in the future is not very convincing”.