Bank of England rate setter Catherine Mann: UK interest rates need to be raised further

investmentweek.co.uk:

Catherine Mann said she would “rather err on the side of over-tightening”.

During a speech at the Canadian Association for Business Economics today (12 September), she said that holding rates constant at the current level risks «enabling further inflation persistence, which will have to be unwound eventually with a worse trade-off».

«Would I rather assume that, with the current monetary policy stance and standard models, inflation is forecast to undershoot the target?,» she asked. 

«Or that, given what we have learned about time variation and non-linearities, we need to position ourselves accordingly and raise rates by more. I believe it would be prudent to risk an error that can be more easily rectified.»

Bank of England's Andrew Bailey: 'We are much nearer the top' of the hiking cycle

This was contrary to governor Andrew Bailey's suggestion last week that the UK is past the phase where rates needed to be raised and could be held at their current level of 5.25%, as the nine-member MPC gears up for its upcoming decision on 21 September.

Mann said that if the persistent component of inflation, now at 6.8%, and set policy consistent with a world that «may no longer exist», it may contribute to the «persistent overshoot» of the Bank's 2% target. 

«The longer this overshoot is allowed to continue, the more likely a departure from the old  ‘low inflation, low volatility' steady state,» she added. 

She also said it is «a risky bet» that inflation expectations are sufficiently well-anchored and to wait for core inflation to ease down, as this extends the duration «way above» the target-consistent rate. 

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