The Bank of England policy maker Silvana Tenreyro set out a case for interest rate reductions, saying an “earlier and faster reversal” of recent hikes is likely to keep inflation from falling well below target.
(Bloomberg) — The Bank of England policy maker Silvana Tenreyro set out a case for interest rate reductions, saying an “earlier and faster reversal” of recent hikes is likely to keep inflation from falling well below target.
The central bank’s most dovish policy maker warned that the UK is facing a “significant inflation undershoot” after the BOE boosted its key lending rate to 4.25% at its most recent meeting, the 11th straight hike.
The comments build on Tenreyro’s longstanding resistance to the BOE’s quickest cycle of rate rises in three decades and set out argument for a pause or end in that process. Investors are increasingly betting that the BOE will hike only once more this year.
Tenreyro has been the most vocal of the BOE’s nine Monetary Policy Committee members in cautioning against further rate increases — despite double-digit inflation and rapid wage growth that leaves the majority concerned about a wage-price spiral. She argued that energy prices and supply chain constraints have eased even faster than anticipated.
“With Bank Rate moving further into restrictive territory, I think a looser stance is needed to meet the inflation target in the medium term,” Tenreyro said at the Scottish Economic Society annual conference in Glasgow on Tuesday. “I expect that the high current level of Bank Rate will require an earlier and faster reversal, to avoid a significant inflation undershoot.”
UK inflation has surprised economists by remaining stubbornly above 10% — five times the BOE target. Officials expect a rapid cooling in that throughout 2023 after natural gas and electricity prices retreated from last year’s highs. Tenreyro warned that previous hikes feeding through to the economy will weigh on demand, loosen the labor market and pull down inflation.
“In the absence of further counterbalancing cost-push shocks, I judge inflation is likely to fall well below target,” she said.
Tenreyro only has two more meetings left before her term ends, threatening to shift the balance of the BOE’s rate-setting committee if a more hawkish policy maker is picked by the Treasury. An announcement on her replacement may be imminent.
The bulk of Tenreyro’s speech was a defence of the bank’s controversial quantitative easing program, which she said was shrouded in “pernicious myths.”
Since the financial crisis, the BOE has been on a £895 billion bond-buying blitz under quantitative easing. With interest rates already at rock-bottom levels, QE became the BOE’s key tool to support the economy during the pandemic.
The BOE is now unwinding its bond purchases but later rounds of QE have faced fierce criticism, including from former BOE policy makers and Mervyn King, who served as governor during the global financial crisis more than a decade ago.
But Tenreyro argued that “the framing that money was being ‘created’ or ‘printed’ probably fed into some of the most pernicious myths about QE.”
“QE is an asset swap: it does not create new private-sector assets, which is how some may understand ‘money printing’ descriptions,” she said. “QE affects the economy only to the extent it affects interest rates. There is no separate ‘money’ channel that can unleash inflation.”
Outside of crisis times, she added, the effects of QE on yields were likely to be “small and temporary.” Trying to directly equate changes in QE or its reverse, quantitative tightening, with a fixed Bank Rate equivalent “can lead us astray.”
Read more:
- UK INSIGHT: Recession Cancelled, BOE Inflation Fight Is Big Risk
(Updates with comments from speech.)
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