The Bank of England has been warned it may need to slam the brakes on its interest-rate cutting spree amid growing fears of another inflation shock.
While Governor Andrew Bailey insists there is nothing to worry about, former top officials are raising the alarm – urging caution before the UK plunges into yet another economic crisis.
Brits will remember how the ‘transitory’ inflation surge after the pandemic turned into a prolonged nightmare, sending energy bills and shopping prices through the roof. Now, ex-BOE rate-setters are worried that history could repeat itself.
“If this continues for the next couple of months, then I would be nervous about making further cuts,” warned Martin Weale, former Monetary Policy Committee (MPC) member and professor at King’s College London.
Despite Bailey’s reassurances, inflation jumped to 3% in January – higher than expected – and could climb to 4% or more, fueled by soaring employment costs and businesses hiking prices to offset higher taxes and wages.
DeAnne Julius, a former rate-setter, says now is not the time to gamble with Britain’s fragile economy.
“Businesses that can raise their prices are going to do so to try to cover at least part of the additional cost they’re facing starting April 1, when the national insurance increase comes in and the minimum wage goes up,” she told Bloomberg.
Weale echoed those concerns, highlighting disturbing trends in wages and service prices. “We’ve got an adverse trend in wages. We’ve got an adverse trend in service prices. We’ve got an adverse trend in core inflation. Put them all together, and it’s a big worry,” he stressed.
Despite these warnings, Bailey and his rate-setting panel remain confident, arguing that the latest inflation spike is driven by ‘temporary’ factors, mainly energy costs. The BOE has been on a rate-cutting mission since last August, with financial markets expecting at least two more reductions this year.
But with private sector wage growth running at over 6% and inflation expectations creeping higher, some experts believe the central bank is underestimating the threat.
Deutsche Bank now forecasts inflation could soar to 4.25% by summer, making further rate cuts a dangerous move. Chief UK economist Sanjay Raja warned that interest rate reductions might have to be “more backloaded than frontloaded” – meaning the BoE could be forced to hold off on cuts for longer than expected.
Deputy Governor Dave Ramsden has also voiced concerns. In a speech on Friday, he admitted that wage settlements have been stronger than anticipated, while weak productivity is hampering the economy’s ability to grow without stoking inflation.
“If they get any kind of hint that this thing is running away from under them, they’re going to sit tight and, I think, just hold off on continuing on their cutting path,” warned Katharine Neiss, former BoE economist and deputy head of global economics at PGIM Fixed Income.
However, some argue that inflation fears are overblown. Former MPC member Michael Saunders believes the economic outlook remains sluggish, and any inflation spike will be temporary.
“I don’t like the language of ‘looking through’ an inflation pickup because it implies you put no weight on it, and you should put some – just not very much,” said Saunders, now senior policy adviser at Oxford Economics.
