Economists believe that interest rates have likely peaked, and will start to fall at some point this year
A member of the Bank of England’s interest rate-setting panel, Sarah Breeden, has shared that she is “less concerned” now than in December about the need for rates to rise further.
She explained that less than two months ago, she was worried that ongoing inflation might mean more “tightening” would be necessary. However, recent evidence shows that Consumer Prices Index (CPI) inflation is continuing to fall, and at a faster rate than had been previously expected.
Last week, the Bank’s Monetary Policy Committee (MPC), which Ms Breeden is a part of, kept interest rates unchanged at 5.25%. For the first time since the pandemic, one member of the committee actually voted to cut rates.
Economists believe that rates have likely peaked, and will start to fall at some point this year. However, the forecasts the Bank released last week also suggest that the cuts might happen later than previously expected. “In December, I judged that domestic risks were skewed to the upside,” Ms Breeden said in a speech on Wednesday.
She added: “As I set out then, the high inflation scenario would also, in my view, be the more costly of the two, and so was the more important scenario to lean against when setting monetary policy. At that juncture, the question I was focused on was whether there was evidence of more persistent inflationary pressures which might mean we needed to tighten further.”
“As I have become more confident that persistence is likely to evolve as embodied within our forecast, I have become less concerned that rates might need to be tightened further. Instead my focus, and indeed the focus of many on the MPC, has shifted to thinking about how long rates need to remain at their current level.”
Ms Breeden also issued a warning: in order for inflation in the services sector to return closer to the Bank of England’s 2% target, there would need to be “some combination” of workers accepting lower pay rises and companies making do with smaller profits.
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