Former Bank of England policymaker says 'hold' rates at 4.5 per cent in May
Former Bank of England rate-setter Jonathan Haskel has indicated that current high inflation levels warrant maintaining interest rates at 4.5 per cent in May.
Investors and analysts, anticipating a cut in interest rates next month to address concerns over low growth, are pricing in up to three additional reductions by year's end, as reported by City AM.
However, Haskel, who served on the Bank's Monetary Policy Committee (MPC) until August of the previous year, argued for a "wait and see" stance despite potential deflationary impacts from President Trump's tariffs.
In conversations with City AM, Haskel remarked: "Core inflation in the UK, dominated by domestically generated service sector inflation, is above target-consistent levels," and stated, "Thus, and given the uncertainty around what the enduring tariff level will be, I would favour a 'wait and see' policy and so hold UK rates at the next meeting."
February saw inflation reach 2.8 per cent, spurred by a five per cent surge in services prices, well above the Bank of England's consumer price inflation (CPI) aim of two per cent.
Haskel acknowledged that the comprehensive tariffs would put a damper on economic activity and inhibit growth as global markets adjust to open trading with the US.
He also agreed with current MPC members Swati Dhingra and Megan Greene that such tariffs would exert a "deflationary for the UK economy" effect on the UK economy.
According to Haskel, the influx of cheap goods from countries like China, which is subject to tariffs exceeding 100%, would likely drive prices down. Nevertheless, he maintained his stance.
These comments offer a glimpse into the thought process of the more hawkish MPC members, who are growing increasingly concerned about persistent inflation.
Clare Lombardelli, a current MPC member, expressed uncertainty about the impact of Trump's tariffs on inflation, citing the potential for retaliatory measures from other countries.
Haskel's views diverge from those of former deputy Bank governor Charlie Bean, who advocated for a rate cut of up to 50 basis points. David Blanchflower, a former rate-setter, even suggested convening an emergency meeting before May 8.
Kallum Pickering of Peel Hunt, who typically takes a hawkish stance on monetary policy, argued that the Bank has an "easy" decision to cut interest rates, as high inflation is no longer a concern due to tariffs.
"We can worry a lot less about inflation, and therefore we can start easing a little bit faster," he told City AM.
"Growth is likely to be weaker, so rates need to come down."
Pickering suggested that Andrew Bailey should advise the Prime Minister to refrain from imposing reciprocal tariffs, thereby avoiding a near-term inflation shock. He also stated that predictions of inflation potentially reaching as high as 3.75 per cent were not "irrelevant".
"It's not even worth paying attention to economic data that is telling you about the economy before the US dramatically escalated tariffs. It's just, it's redundant."
Pickering further suggested that the elevated gilt yields, which are increasing borrowing costs, were a consequence of fears surrounding low growth and these changes provided further justification for the Bank to reduce interest rates.
"In a strange way, if the Bank of England were actually to go a little bit quicker with rate cuts and support growth expectations, it would probably have the effect of reducing bond yields in the long run because markets would worry less about recession risk."
Central banks around the world are rapidly responding to the impacts of a full-blown trade war.
Policymakers in India and New Zealand cut interest rates on Wednesday. Reserve Bank of India Governor Sanjay Malhotra said "concerns on trade frictions are coming true."
The US Federal Reserve has come under pressure from JP Morgan executive Bob Michele – and the US president himself – to cut interest rates.
Federal Reserve Bank of Minneapolis President Neel Kashkari said high inflation expectations in the US would delay interest rate cuts while some analysts believe that markets may have overestimated the number of cuts due to be made this year.
"The Fed is being held back from providing additional policy rate cuts because there is limited evidence that the economy needs immediate additional support," Seema Shah, chief global strategist at Principal Asset Management, told City AM.
"In order to cut rates, the Fed needs to believe that softer growth will exert downward pressure on inflation in the medium term and inflation expectations must remain anchored."
