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Current base rate may need ‘earlier and faster reversal’, says MPC member

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  • 04/04/2023
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Current base rate may need ‘earlier and faster reversal’, says MPC member
The current base rate of 4.25 per cent may “require an earlier and fast reversal” in order to “avoid a significant inflation undershoot”, said a key economist.

 

Speaking at the SES Annual Conference in Glasgow, Silvana Tenreyro, Monetary Policy Committee (MPC) external member and professor of economics at the London School of Economics, explained: “With base rate moving further into restrictive territory, I think a looser stance is needed to meet the inflation target in the medium term.

“In general, a looser stance can be achieved either through lower base rate today, or through lower base rate in future, which leads to a lower market curve.”

Tenreyro explained that a lower market curve would lead to lower lending rates and financial conditions today.
She added that at the same time if the base rate moved further into “restrictive territory”, there were “limits to the amount of loosening that can be provided through this mechanism”.

“So, I expect that the high current level of bank rate will require an earlier and faster reversal, to avoid a significant inflation undershoot,” Tenreyro said.

She added: “As the effect of the large and rapid tightening in policy gradually come through over the course of 2023 and 2024, this is likely to drag demand well below its potential, loosening the labour market and pulling down on inflation.

“In the absence of further counterbalancing cost-push shocks, I judge inflation is likely to fall well below target.”

She explained that, given that outlook, she had voted for no change in the base rate in recent months rather than further tightening.

She continued that future decisions of the MPC by herself and its members would “depend on how the data evolves” and that the MPC would set policy to ensure inflation returns to its target of two per cent in the medium term.

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