(Alliance News) - Bank of England rate setter Megan Greene said interest rate cuts "should still be a way off" in the UK, predicting the "last mile" in getting inflation down "may prove the hardest."
Greene, one of the more hawkish members of the BoE’s monetary policy committee, argued in the Financial Times on Thursday that investors had underestimated the risk that inflation would remain high for longer in Britain than in other advanced economies.
She also questioned market pricing that suggested the UK’s central bank would cut rates earlier and by more than the US Federal Reserve this year.
"The UK economy has faced the double whammy of a very tight labour market and a terms of trade shock from energy prices," Greene wrote. "Inflation persistence is therefore a greater threat for it than the US."
"In my view, rate cuts in the UK should still be a way off," she added.
https://www.ft.com/content/13579c61-5e1f-48b5-bb4d-2dc787444fb3
Greene noted that while recent inflationary shocks - worldwide supply chain issues, a war in Europe and energy and food spikes - have been global in nature, they have reverberated differently across economies. The Ukrainian war had a far bigger impact on energy costs in the UK than the US. Even as global shocks subside, second-round effects in the UK may take longer to abate, she suggested.
"Following the energy price shock, UK inflation expectations have been more backwards-looking. This amplifies second-round effects, as companies and households are more sensitive to the initial shock."
"Higher inflation expectations have translated into higher pay growth, by some metrics now between 6% to 7% in the UK versus 4% to 5.5% in the US."
"Such sticky wage growth is a significant component of services inflation. It will need to slow further to see services inflation return sustainably to target-consistent levels. This last mile may prove the hardest. UK services inflation remains much higher than in the US."
"Momentum in the markets has been towards pricing in later rate cuts by the Fed as economic growth remains robust. In my view, rate cuts in the UK should still be a way off as well," she commented.
Markets have been reassessing interest rate prospects in the wake of stronger-than-expected US CPI figures on Wednesday.
Richard Hunter at interactive investor noted it had been expected that the US Federal Reserve would be the first to cut interest rates, ahead of the ECB and the Bank of England.
It is now increasingly possible that it could be the last, he said.
By Jeremy Cutler, Alliance News reporter
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