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Bank of England official warns of higher inflation if rate rises lag US

One of the Bank of England’s more aggressive policymakers has warned that the UK will face a further rise in inflation if the central bank does not raise interest rates as quickly as the US Federal Reserve, causing the pound to fall.

Speaking online at a Market News International event, Catherine Mann said a decline in sterling would risk exacerbating high inflation in the UK, which five times she said was no longer just imported but “embedded” was in the domestic pricing decisions of companies.

With official inflation likely to rise from 9 percent for April when May figures are released on Wednesday, further price increases due to the pound’s weakness could intensify the cost of living crisis, the foreign monetary policy member said. from the bank. the committee said.

The pound, which traded at $1,2232 Monday afternoon, has lost 11.4 percent of its value against the US dollar over the past year, although it has remained broadly stable against the euro.

With inflation already set to rise to more than 11 percent in the fall, Mann said a further decline in the pound would be likely if the BoE raises rates much more slowly than the US Fed, which in turn would push inflation further. .

Mann, who last week voted for a 0.5 percentage point hike to 1.5 percent in UK interest rates, accepted that fast-tightening policies could hurt economic growth, but she thought the overall results would be better if the BoE would act quickly to beat inflation and then reverse rate.

“A more robust policy movement . † † reduces the risk of domestic inflation. † † is further boosted by inflation imported through a depreciation of the pound,” she said. “I am opening the door to a medium-term policy rate reversal as domestic demand support wanes and weakness in external sources of demand bites.”

With the BoE failing to forecast inflation from 1.5 percent in April 2021 to 9 percent a year later, Mann said it was now clear that inflation was part of the normal process for UK companies to set prices.

Unlike BoE governor Andrew Bailey, who has said 80 percent of price increases came from abroad and the central bank couldn’t do anything about it, the MPC’s external member said that “the incoming data on inflation increasing domestic anchorage, perseverance and momentum”.

She said that of all items measured by the Office for National Statistics, nine in ten prices were now rising faster than they were between 2012 and 2019.

She thought incomes were being hit, but spending could prove more resilient, further embedding inflation, especially if the BoE were reluctant to tighten monetary policy.

In what she called an “extremely stylized” model, she noted that if the Fed typically raised interest rates by 1 percentage point, the pound would fall because the BoE would not follow suit and British prices would drop another 0.5 percent. to rise.

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