Risks to the UK’s inflation outlook may have increased, justifying the need to take a cautious approach to cutting interest rates, a Bank of England policymaker has said.
Megan Greene, a member of the Bank’s rate-setting committee, said the current uncertainties and risks facing the economy meant it may be better to “skip” rate cuts rather than lower them quickly.
Speaking at Adam Smith Business School at the University of Glasgow, Ms Greene said “supply shocks” to the economy were likely to become more frequent.
This refers to events such as the Covid pandemic and the war in Ukraine that impact production and therefore can send prices higher.
She said the lessons learned from recent supply shocks “suggest that the risks to our inflation outlook have shifted to the upside”.
This was partly because of weak productivity growth in the UK as well as the rising unemployment rate, which both put pressure on overall inflation.
Ms Greene said it was clear that a “year-long tick up in inflation puts the UK in stark contrast with our developed economy peers”.
She also pointed to climate change and higher tariffs as factors that could generate supply shocks in the future.
However, the policymaker said the risks from global trade tensions had “abated somewhat” due to a “flurry of trade agreements” between the US and other countries helping to reduce uncertainty.
Ms Greene stressed that she was “not in favour of policy reversals by central banks” – referring to sharp interest rate cuts – and that could mean “skipping cuts” was a better approach.
“Instead, I believe an appropriate response to the uncertainty and risks we are currently facing should involve a cautious approach to rate cuts going forward,” she concluded.
