(Bloomberg) -- Bank of England policymaker Swati Dhingra has elaborated on her decision to call for interest rates to be slashed, saying taking a “gradual” approach would still leave monetary policy as a drag on the economy this year.
In her first public comments since she and Catherine Mann voted for a half-point rate cut on Feb. 6, Dhingra said consumer spending was likely to remain weak and inflationary pressures subdued.
Dhingra and Mann were outvoted by the rest of the Monetary Policy Committee in favor of a quarter-point cut to 4.5%, with Governor Andrew Bailey saying officials were taking a “gradual and careful’ approach to further easing. Money markets are only fully pricing in two more reductions this year.
“So even if you thought of a 25 basis points a quarter type of gradual definition, you would still pretty much, according to most metrics, be in restrictive territory all of this year,” Dhingra said at the University of London Monday. “I am worried about the tickup that’s coming, largely because this happens to be in pretty salient items,” but she added: “consumption remains pretty weak, so we’re not seeing that resurgence of inflationary pressures.”
Her comments came hours after she was appointed to a second three-year term on the MPC, where she has consistently maintained a dovish stance. Mann, however, surprised investors by calling for a 50 basis-point cut as she has been the most hawkish member.
Policymakers are facing a challenging outlook, with the economy flatlining and inflation making a comeback amid rising energy prices. It hit a higher-than-forecast 3% in January and is forecast by the BOE to reach 3.7% in the third quarter — almost double the 2% target. The central bank doesn’t expect so-called second-round effects on wages and prices but says they can’t be ruled out. Dhingra was sanguine.
On the inflation figures, “they look like there’s more inflation in the system than if you were to look at the really disaggregate numbers,” she said. “Pretty substantial disinflation” in services producer prices is under way when housing is excluded.
Dhingra said there is a clear evidence that the labor market is cooling. Insolvencies numbers “are starting to suggest that small businesses are suffering more than the average,” she said. Job losses in retail and hospitality are likely because that’s where vacancies are below pre-Covid levels.
While wages have increased, consumption hasn’t, implying “something has changed somewhere along the way.” Household savings are not “chasing” goods and services.
“Consumption weakness isn’t going away” Dhingra said. “We basically aren’t recovering fully and I think that’s the reason that I have been much more on the side of wanting to reduce the level of restriction that we see in the economy,” she said.
“I think two things we can all pretty much agree on is there is a fair amount of restriction in the system, and that the disinflation process doesn’t look like it’s derailed.” Dhingra was speaking at the Birkbeck Centre for Applied Economics.
