One of the Bank of England’s policy setters has warned against raising interest rates in response to short-lived inflationary pressures, arguing it could be “self-defeating”.
Supply chain disruptions along with surging energy prices have helped push inflation above the bank’s targeted 2%, with the consumer price index reaching 3.2% in August. The BoE expects inflation will continue rising, peaking at around 4% this year.
That has prompted markets to start pencilling in an earlier-than-expected rate rise, a view strengthened after monetary policy committee member Michael Saunders told the Sunday Telegraph last month that it was appropriate for financial markets to expect an early rate rise.
But on Thursday, fellow MPC member Silvana Tenreyro looked to push back against the prospect of an early rate rise.
In a visit to Wales to speak to local businesses, she told the Western Mail: “Activity has come in weaker than we anticipated in our last forecast, and we remain a normal-sized recession below the pre-Covid level of GDP.
“Typically, for short-lived effects on inflation, such as the big rises in the prices of semiconductors or energy prices, it would be self-defeating to try to respond to their direct effects.
“There is uncertainty on the exact persistence and the size of these big pick-ups in prices. 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.”
Rates were cut to an all-time low of 0.1% in March 2020, in response to the pandemic.