Consumers face the prospect of permanent interest rate rises amid geopolitical tensions and a “slower globalisation”, Bank of England officials have warned.
Megan Green, an external member of the Monetary Policy Committee, speaking at an IIF-sponsored event in Washington, said the last mile of slowing the pace of inflation will be the most difficult.
This comes after money market traders expected the Bank of England to cut interest rates five times in early 2024 after inflation fell to a weaker-than-expected 3.2% in March. The move came after prompting expectations that there would be only one rate cut this year.
As inflation soared to a 41-year peak of 11.1% in October 2022, policymakers raised interest rates to 5.25%, a 16-year high, to dampen economic demand.
Rising interest rates have increased the cost of mortgages for thousands of homeowners and made it harder for consumers to borrow.
Mr Green warned that the world was returning to an era of greater “volatility and uncertainty”, which could push prices higher.
She said: “That… once things settle down… it may actually mean that interest rates need to be a little higher than we previously thought.”
Mr Green said economic uncertainty was leading to companies holding back investment.
“The more I go around the UK in particular and talk to people…the more I hear about volatility and people just sitting on the sidelines because of it.
“If you actually look at the historical background, [volatility] It's actually not that high, so I think primarily this concern is certainly there and it's causing companies and individuals to change the way they allocate their capital. ”
Mr Green also said the jobs market in the UK and wider area was “one of the biggest challenges we are grappling with”.
“The labor market is very tight,” she said, adding that its impact on productivity growth is so far unclear.
“For example, productivity growth may be higher if it is the result of unusually strong demand for labor. If this is simply a reflection of labor hoarding, it could mean that firms are rehiring after the economy opens. They have the trauma of having to hire people, and that actually reduces their productivity.”
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