In a speech given at the Securities Industry Conference today, MPC member Dave Ramsden said this approach would have also avoided costly and extended tightening later down the line.
Ramsden was one of the three committee members who vote for a steeper 0.75 per cent increase to the Bank Rate, which would have put it at 2.5 per cent instead of its current level of 2.25 per cent. Such an increase was also widely expected by the markets.
Saying that rising energy costs were primarily responsible for increasing inflation, Ramsden recognised that the government’s Energy Price Guarantee would reduce a near-term peak, but said other support measures would add to pressure.
He said he and the two other members who voted for a larger rate increase “had already registered more persistent inflationary pressures” and said “medium-term measures of inflation expectations remained high”.
Fiscal developments
Ramsden said the MPC had not yet factored the government’s Growth Plan into its decisions, but said it would assess the impact on demand and inflation in time for its next meeting on 2 November.
He added: “Based on what we know so far, these impacts are likely to be material for the economic outlook over the next three years, which is also the horizon relevant for monetary policy.”
Volatile markets
Ramsden said global financial markets had been “volatile” in recent months, with “notable rises in government bond yields, large moves in exchange rates and falls in risky asset prices”.
He added: “Overall the adjustment in market prices has been consistent with tighter monetary policy globally and the deterioration in the economic outlook.”
These trends were more pronounced in the UK market during August and in the lead-up to the MPC’s September meeting on the 23 September, and Ramsden said this began to “really stand out” over the last two weeks.
He said this market “turbulence” was impacting the real economy, notably borrowing costs. Highlighting the popularity of two-year fixed rates, Ramsden said the swap rates which influence their pricing had risen from 0.5 per cent last year, to four per cent last month and even higher to 5.4 per cent at yesterday’s market close. This is lower than the six per cent seen in the last two weeks, however.
The Bank’s latest figures for quoted mortgage rates in September showed that pricing for two-year fixes had risen by 50 basis points since August and were nearly three per cent higher than last year.
Ramsden said rates had continued to rise in October.
Forceful action
Ramsden said the MPC would respond forcefully if needed, if the outlook hinted at further inflationary pressures.
He added: “I think the central question for all nine of us on the MPC is how forceful do we need to be, to ensure inflation does return sustainably to the two per cent target in the medium term.
“These are very challenging times for the UK economy and millions of households and businesses are experiencing real hardship as a result of the cost of living crisis. On the MPC, we are acutely conscious that for many our monetary policy actions are adding to the difficulties caused by the current situation.”
