An external Bank of England (BoE) policymaker has said interest rates in the UK are already higher than necessary to reduce inflation to its target level. A series of base rate hikes since December 2021 has resulted in interest rates rising from 0.1% to 3%, and the central bank has been clear that there are likely to be further increases.
However, Silvana Tenreyro, an external member of the BoE’s Monetary Policy Committee (MPC), recently said that “policy was already in restrictive territory,” indicating that rates were higher than necessary to tackle soaring inflation. She was speaking at a conference in London just before November’s MPC meeting when interest rates rose by a bumper 0.75%.
Too early to see the full effects
During her speech, Tenreyro said it was too soon to determine the impact of what she described as “the fastest tightening in policy in the MPC’s history.” She claimed the effects of the rate rises were slower to impact the economy than in the past because more people had fixed-rate mortgages and most homeowners had yet to refinance.
She also said that even with the base rate remaining at its current level rather than being increased again, there was likely to be a recession, and inflation was likely to drop to below-target levels in the medium term. This could result in the Bank of England cutting interest rates from 2024.
The Bank of England has warned that further interest rate hikes are likely, which means the UK will face a lengthy recession, a sharp increase in unemployment, and a drop in living standards. Data released last week suggests that Britain has already entered a recession.
While senior officials from the central bank have said that aggressive monetary policy tightening is necessary, several MPC members have said that it is unlikely the base rate will rise to levels predicted weeks ago. Before the last MPC meeting, there was speculation that interest rates would need to rise as high as 5.25%, but some MPC members now believe the peak will be lower. There are concerns that central banks, including the Bank of England, were too slow to increase interest rates following the Covid-19 pandemic. However, there are now fresh concerns that the banks might be acting too aggressively and that this could lead to a sharper economic downturn.