The Bank of England should take a “steady-as-she-goes approach” to further base rate cuts to avoid driving up wages and services inflation, says policymaker Megan Greene.
The Monetary Policy Committee’s external member was among those who voted to hold bank rate at 5% last week, following a 0.25% cut in August. Its first reduction in four years.
The move came as inflation was reported as 2.2% in August, unchanged from July, just above the BoE’s 2% target.
But Greene points to “an overall weakness of UK consumption”, linked to wage growth at 5.1% between May to July, the highest it has been since April to June 2022.
Services inflation came in at 5.2% in the year to August from 5.6% the month before. However, the MPC has said it wants this figure to fall below 5%.
Greene says “services inflation has remained stubbornly persistent,” in a speech to the Chambers of Commerce in Newcastle.
She said she would “be looking for incoming data to provide evidence” that a period of “economic slack is required to bring inflation sustainably to target” before voting to cut rates.
The rate-setter pointed out: “It is clearly too early to see the impact of our 0.25% cut in August”.
She added: “Until then, I believe a cautious, steady-as-she-goes approach to monetary policy easing is appropriate.”
Greene pointed out that rising and falling rates take a particularly long time to feed through to mortgage holders.
She said in June, “over three million households, accounting for 35% of all mortgages, were still paying rates of less than 3%.”
The policymaker pointed out: “That 30% of mortgage accounts were expected to have their fixed rate expire before the end of 2026 and the typical homeowner was expected to see monthly payments rise by around £180, or 28%.
“This is a significant additional burden on disposable income that is yet to come for many households, and a smaller proportion will see much larger increases in payments of 50% or more.”
Despite Greene’s comments, money markets are pricing in a UK base rate cut at the committee’s November meeting, followed by a second in December.