Bank rate-setters divided over inflation

Rate-setters on the Bank of England’s monetary policy committee are split over the outlook for inflation as figures are expected to show a rise in consumer prices above 2 per cent last month.
Four members of the nine-strong MPC told MPs on the Treasury select committee that policy changes announced in the budget, in addition to the threat of tariffs from the US president-elect Donald Trump on UK exports, and a fracturing global trading environment, could drive inflation up or down in the coming year.
Official figures released on Wednesday are likely to show a rise in headline inflation from 1.7 per cent in September to as high as 2.2 per cent last month on the back of an increase in household energy bills.
In his first testimony to the select committee since joining the MPC, the external rate-setter Alan Taylor said that he was more worried about inflation slowing on the back of a cooling labour market in the coming months than another rise in prices.
Taylor, who voted for a rate cut this month, said his expectations for the path of interest rates was in line with financial market projections that point to four rate cuts next year to take the base rate down to 3.75 per cent. He warned, however, that monetary loosening could still evolve faster than this “gradual path” if consumers hold back on spending and the labour market slows as a result of the higher national insurance tax on employers announced in the budget.
“There are a lot of factors that are making me worried now and making me focus on labour market factors in the months ahead,” Taylor said.
Catherine Mann, the most consistently hawkish member of the MPC who was the only policymaker not to support a rate cut this month, said the decision to raise the national living wage and a higher cost for employers’ national insurance contributions were “upside risks” to inflation.
“The only downside risk I can think of is global pricing of goods coming out of Asia. Other than that, I can only see upside risks,” Mann said, adding that she supported keeping the base rate steady at 4.75 per cent to manage the inflationary risks.
“When inflation has an upside bias to it, firms and workers both react to it with an upward bias. There is downward rigidity and upward ratchet and that is an important considering in my thinking.”
Clare Lombardelli, the Bank’s deputy governor for monetary policy, said she viewed the risks to inflation as more “balanced”. This was the result of a downward push from a slowing economy after growth petered out to just 0.1 per cent in the third quarter.
Andrew Bailey, the governor, agreed that there were “risks on both sides” of the inflationary outlook. He said companies could react in inflationary or disinflationary ways to the rise in NICs by either reducing wages or cutting jobs.
The governor said he was still concerned about elevated rates of services inflation, which was stuck at 4.9 per cent in September and is expected to rise to 5 per cent in the latest figures for October.
Jack Meaning, chief UK economist at Barclays, said Taylor’s remarks put him “on the doveish side” of the MPC’s majority, which is still likely to vote for rate cuts every quarter.
“We expect this to be the path Bank rate takes until there is sufficient downside news in the data to give the MPC confidence that sequential cuts are required. We expect this to happen in May 2025, once the MPC has seen wage settlements for the first quarter, the impact of the national living wage increases, and improved data from the labour force survey.”