Interest rates will need to rise again, warns Bank of England rate-setter

Britain’s central bank policymakers are “duty bound” when they meet this week to push the UK into recession to cap rising inflation, a former Bank of England (BoE) official has said.

Interest rates will need to rise again to prevent inflation becoming a persistent problem in the UK, a Bank of England policymaker has warned.

A shortage of workers and high wage demands were likely to continue pushing up inflation, acting as a counterweight to falling energy prices, said Catherine Mann, a member of the Bank’s monetary policy committee (MPC), which sets the base rate.

She said more tightening was needed and cautioned that a pivot on monetary policy towards interest rate cuts was not imminent, signalling that they were likely to rise again when the MPC meets next month.

The MPC has increased its base interest rate 10 times since December 2021 to 4% to dampen consumer spending and limit the increase in the consumer prices index, which hit 10.1% in January.

In a speech at the Resolution Foundation’s headquarters in London, Mann argued that high interest rates were needed to prevent inflation becoming embedded in wages and prices. She warned this could lead to “extended persistence of inflation into this year and the next”.

A former investment bank economist who joined the nine-member MPC in 2021, Mann has consistently argued for a sharper increase in interest rates than her colleagues to quell inflation. She was a lone voice calling for a 75 basis point increase, when the MPC lifted rates by half a per cent, from 3% to 3.5% in December.

City analysts have forecast that inflation will fall to about 2% by the end of the year, well below the 4% prediction by the central bank.

They argue that despite a tight labour market, falling energy prices would bring down inflation, leading to lower wage demands.

The MPC members Silvana Tenreyro and Swati Dhingra voted in December to maintain interest rates at 3%, arguing that the effects of high borrowing rates would feed through into the wider economy this year.

More than 1.5 million mortgage payers are expected to refinance their loans at much higher interest rates this year, eating into their disposable incomes.

Mann said: “We have an inflation remit, and we will achieve it one way or another … Failing to do enough now risks the worst of both worlds – higher inflation and lower activity – as monetary policy will have to stay tighter for longer to ensure inflation returns sustainably back to the 2% target.”

Money markets are forecasting that when the MPC meets next month it will decide on a quarter-point rate rise, to 4.25%.