A senior Bank of England policymaker said Britain's fight against inflation remains unfinished and interest rates will need to be kept higher for longer than financial markets had expected.
Jonathan Haskell poured cold water on expectations that the City will cut interest rates in August, saying inflation is set to bounce back above the government's 2% target.
“We want to keep interest rates on hold until there is greater confidence that underlying inflation pressures have subsided sustainably,” Haskell, a member of the Bank of England's Monetary Policy Committee, said in a speech at King's College London on Monday.
He added there were “positive signs” in the fight against soaring prices after consumer price inflation slowed to 2 percent in May, but warned that any return to the government's official target would be temporary due to pressures from a tight jobs market.
“As these shocks spread through the economy and the labor market remains tight and weakened, inflation is likely to remain above target for a considerable period of time,” he said.
Financial markets now estimate there's a 60% chance the central bank will cut interest rates on Aug. 1 for the first time since the coronavirus pandemic began. Some members of the bank's nine-member Monetary Policy Committee have been urging lower official borrowing costs in recent months, but Haskell voted to keep rates steady.
The economist, whose term on the MPC ends at the end of August, has been a hawkish member of the interest rate decision committee and has long been cautious about cutting interest rates. The appointment of a successor to her position will be one of the first tasks for the new Chancellor of the Exchequer, Rachel Reeves, after she takes office.
In the first speech by the bank's policymakers since the general election, Haskell said the lingering effects of higher energy prices after Russia's invasion of Ukraine were “enough to provide impetus to current inflation”. UK inflation peaked at 11.1% in October 2022.
“The labor market remains tight and we are concerned it may still be deteriorating. We want to keep rates unchanged until we have greater confidence that underlying inflation pressures have subsided sustainably,” he said.
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Before last week's election, Chancellor of the Exchequer Rishi Sunak argued that the “tough decisions” taken by the Conservative government had helped to “turn around” the economy, and told voters a vote for the Conservatives was a vote for lower interest rates.
The former chancellor called a general election in May after official figures showed inflation had fallen to 2.3% in April, amid expectations among Conservative Party insiders that the bank would cut interest rates in June ahead of the vote.
But the central bank has consistently warned that inflation could pick up in the second half of the year under pressure from rising prices in the services sector and solid wage growth, and last month kept its policy rate unchanged at 5.25%.
Keir Starmer has shifted the party to a focus on the economy, arguing that Labour would bring stability to policy-making after years of turmoil under Conservative governments and ultimately boost economic growth.