A senior Bank of England policymaker has warned that financial markets are expecting too many interest rate cuts this year and that the UK central bank is unlikely to move before the US Federal Reserve.
Catherine Mann, an external member of the Bank’s rate-setting monetary policy committee (MPC), said there were risks that UK inflation could persist at higher levels than in the US or the eurozone.
City traders are pricing in three quarter-point interest rate cuts this year, with a possible first downward shift from as early as May or June. Money markets give a 20% chance of a cut in May, before the Fed or the European Central Bank.
However, dampening expectations for large interest rate cuts this year, Mann told Bloomberg TV on Tuesday: “They’re pricing in too many cuts – that would be my personal view – and so in some sense, I don’t have to cut because the market already is.”
“Wage dynamics in the UK are stronger and more persistent than the wage dynamics in either the US or the euro area,” she said.
“Underlying services dynamics are also stickier more persistent than either the US or the euro area. So on that basis, it’s hard to argue that the BoE would be ahead of the other two regions, particularly the US.”
Mann last week voted with most of the MPC to hold interest rates at the current level of 5.25%, switching from her previous stance as one of the nine-member panel’s toughest advocates for a further rise in borrowing costs.
The Bank’s policymakers said they were seeing “encouraging signs” of falling inflation after keeping interest rates on hold for a fifth time at the highest level since the 2008 financial crisis.
The Bank has been watching closely for signs that inflation is heading back towards its 2% target after a sustained period of rapid price rises. The latest official data last week showed the headline rate fell to 3.4% in February, its lowest level for two and a half years, driven in part by a slowdown in the pace of food and restaurant price rises.
The Bank expects the government’s fuel duty freeze and recent falls in the price of energy and food to push inflation below 2% in the second quarter. It peaked at 11.1% in October 2022.
Andrew Bailey, the Bank’s governor, has signalled that rate cuts will be “in play” at forthcoming policy meetings. He said last week he believed the central bank was “not yet at the point where we can cut interest rates, but things are moving in the right direction”.
Mann said she had changed her vote from a rate rise to a hold because there were signs of a slowing jobs market, with companies more reluctant to hire.
However, she said financial markets pricing in deep interest rate cuts meant high street banks were already offering cheaper loans to households and businesses – doing some of the Bank’s job to support the economy before it took official action on borrowing costs.
“There has been a substantial easing, even since the vote last week,” she said about market rates. “I think that perhaps markets are a bit too complacent about how long they think the BoE overall – the MPC – will hold rates.”
