The Bank of England risks ‘scarring’ the economy by keeping interest rates too high for too long, according to Citi.
“Further delay on rate cuts risks greater economic scarring and ultimately larger rate cuts in the years ahead,” said the US investment bank in comments on an Institute for Fiscal Studies Budget report published this morning.
The firm’s remarks come after the Bank’s chief economist Huw Pill warned against cutting the base rate “too far or too fast” last week.
However, a day earlier Bank governor Andrew Bailey said that there was room for the central bank to take a “more aggressive” position on rates.
The Bank’s Monetary Policy Committee voted to hold the base rate at 5% last month, following a 0.25% cut in August. Its first reduction in four years.
Markets are betting that the committee will cut the rate by a total of 0.5% to 4.5% in two of its last three meetings before the end of the year.
Inflation came in at 2.2% in August, unchanged from July, just above the BoE’s 2% target.
The Monetary Policy Committee has repeatedly said it is closely watching services inflation and wage growth as signals to further cut the base rate, adding that it would like both of those numbers to fall below 5%.
Services inflation came in at 5.2% in the year to August from 5.6% the month before. Annual growth for regular earnings came in at 5.1% from May to July, according to the latest official data.
But Citi chief UK economist Benjamin Nabarro argued that the Bank should loosen monetary policy to kick-start the economy as it recovers from supply chain shocks and the Liz Truss mini-Budget.
Nabarro said: “Large supply shocks that have choked the UK economy over recent years are easing, the underlying picture subsequently improving.
“Nonetheless, we still face challenges. Recent policy errors – particularly on the fiscal side – now leave firms and households facing simultaneous monetary and fiscal headwinds, just as the residual inflationary risks fade.”
He added: “This risks a more protracted period of softness than is strictly necessary. From a monetary policy side, that also suggests the risks are increasingly shifting from inflation to the labour market.
“The Monetary Policy Committee must be attentive to the associated shift. For now, the Monetary Policy Committee seems determined to secure further evidence of disinflation before meaningfully shifting. This increasingly risks waiting too long.”
Elder added that disagreements on rate policy among the Monetary Policy Committee was a sign of healthy debate.
