The Bank of England will probably have to raise interest rates further from their current 14 year-high to tackle inflation pressures that are gaining a foothold in Britain’s economy, BoE Deputy Governor Dave Ramsden said.
Inflation’s spread was now showing up in rising British pay and companies’ pricing plans, having originally been triggered by the reopening of the world economy from COVID-19 lockdowns and then by Russia’s invasion of Ukraine, Ramsden told Reuters.
Inflation is expected to return to the BoE’s 2% target – down from above 9% now and a projected peak of 13% in October – as the economy goes into a recession and borrowing costs rise.
But there was also a risk of an inflation mentality developing, Ramsden said.
“For me personally, I do think it’s more likely than not that we will have to raise Bank Rate further. But I haven’t reached a firm decision on that,” Ramsden said in an interview.
“I’m going to look at the indicators, look at the evidence as we approach each upcoming meeting.”
The BoE last week raised borrowing costs by the most since 1995 as it took Bank Rate to 1.75% from 1.25%, its sixth increase since December, compounding the biggest two-year disposable income hit for households since at least the 1960s.
“We know that what we’re doing is adding to an already very challenging environment,” Ramsden said. “But our assessment is we needed to act forcefully to ensure that inflation doesn’t become embedded.”
Ramsden, a former senior official at Britain’s finance ministry who joined the BoE in 2017, said a fall in inflation expectations in financial markets was encouraging, as were signs that households and companies thought central bankers would get to grips with the problem.
Asked if Bank Rate was close to hitting a peak, Ramsden said that over the past year the BoE had to deal with the end of COVID-19 restrictions that hammered Britain’s economy and the Russia-Ukraine war that pushed inflation to its 40 year-high.
“We’re in extraordinary period where a lot is changing. So I wouldn’t want to make any predictions about where Bank Rate is going to end up,” Ramsden said.
“I guess one thing I would say is I think inflation expectations remain anchored and that’s really important.”