Bank of England member argues for keeping interest rate at 4%

Swati Dhingra, one of the external members of the Bank of England’s monetary policy committee, argued on Wednesday in favor of keeping UK interest rates at 4%.

The vast majority of inflation was caused by rising energy and import prices, she said, adding that the evidence for an impending wage price spiral was thin. She pointed to weak consumption as evidence that inflation would soon come down for a long time.

“In my view, a prudent strategy would keep policy stable amid growing signs that external price pressures are easing, and be ready to react to changes in price developments. This would avoid over-tightening,” said Dhingra.

Dhingra has been one of the more dovish members of the MPC since joining the interest rate setting committee in September last year.

She dissented from the majority at each of the four meetings, voting to raise rates only once in November and then by 0.5 percentage points rather than the majority vote for a 0.75 point increase. percentage.

His point of view is unlikely to sway the whole committee, but he is not far from straying from comments last week by Andrew Bailey, Governor of the BoE, that he still had no presumption that another rate hike was necessary.

“I would caution against suggesting that either we are done with raising the bank rate or that we will inevitably have to do more,” the governor said, contrasting his view with financial markets. expecting three more interest rate hikes.

Dhingra’s difference with the rest of the committee, she explained, was that she believed there was significant evidence that the prices of domestic goods and services were heavily influenced by rising energy prices. and imports. This applied to heating in restaurants or the energy used to make a loaf of bread, she said.

While examples like these “may appear to be purely domestic measures because most consumers do not import them, final consumption is no longer the dominant channel of international trade,” Dhingra said.

She added that “more than 70% of CPI inflation in 2022 could be explained by increases in energy and import prices.”

Questioning the importance of measures such as core inflation, excluding food and energy prices, as a guide to domestic inflationary pressure, Dhingra said there was still a risk that wage pressures leave inflation too high for too long.

But economic weakness would prevent that, she thought, and the biggest risk was that the BoE would raise interest rates too much.

“Even after a year and a half of above-target inflation, there is little evidence of such cost inflation. [in wage and price pressures] beyond what one would expect following an unprecedented terms-of-trade shock,” Dhingra said, explaining his view that inflation was likely to decline and that It was better not to raise rates further to prevent inflation from falling too far below the BoE’s 2% target in the medium term.