UK risks more persistent inflation than Europe or US, warns Bank rate setter
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The threat of persistent inflation is bigger in the UK than in Europe and the US, a Bank of England rate setter has said.
Megan Greene warned that the UK had faced a “double whammy” in dealing with both a tight jobs market and a trade shock.
She said that the supply side of the market in the UK had been left weaker than in the US in recent years because of Brexit and the pandemic.
The UK has faced the double whammy of a terms-of-trade shock even larger and longer lasting than in the EU, alongside a tight labour market like in the US. Inflation persistence is therefore a greater threat here
Normally this would have meant the UK faced higher inflation as a result, but at the same time demand was weaker than in the US, which had evened things out.
“The UK has faced the double whammy of a terms-of-trade shock even larger and longer lasting than in the EU, alongside a tight labour market like in the US,” Ms Greene said.
“Inflation persistence is therefore a greater threat here.”
In light of the persistence of UK wage and services price pressures, which stand out in international comparisons, I think policy will need to remain restrictive for some time in order for inflation to sustainably return to target
Ms Greene added: “Shocks from Brexit and the pandemic have left UK supply much weaker than in the US in recent years and over the outlook period.
“All else equal, this would mean inflationary pressures are greater in the UK. But UK demand has been weaker than in the US as well.”
Ms Greene, who is a member of the interest rate-setting Monetary Policy Committee, said that rates were currently “restrictive” in the UK.
She said that she was not yet ready to start voting for interest rates to be cut.
I would need to see further evidence that inflation persistence is less embedded than previously feared before I would consider voting to loosen policy
“In light of the persistence of UK wage and services price pressures, which stand out in international comparisons, I think policy will need to remain restrictive for some time in order for inflation to sustainably return to target,” she said.
“Recent signs of persistence starting to ease are encouraging, and I judge that current policy is sufficiently restrictive to bring inflation back to target in the medium-term.
“I would need to see further evidence that inflation persistence is less embedded than previously feared before I would consider voting to loosen policy.”
