Two Bank of England rate setters have backed ‘higher for longer’ interest rate policies to restore price stability and boost consumer confidence.  

High inflation that has fallen from 11.1% in October 2022 to its current 3.8% has “scarred” consumers, said the Bank’s Monetary Policy Committee member Catherine Mann (pictured).  

The cost of living remains above the central bank’s 2% target, with The Bank forecasting that it will hit 4% this month, before falling back to its 2% target “by mid-2027″.   

She said that “the rapid increase in the price level has scarred consumers”, even as inflation has moderated, allowing incomes to rise faster than prices, in a speech to the Resolution Foundation in London this morning. 

The external MPC member pointed to research which shows that households who are more uncertain about future inflation become more uncertain about their future incomes. This leads them to save money, rather than spend it, which pulls down consumption. 

She added that the Bank should keep interest rates high to bring inflation down and reassure consumers that price stability is intact, rather than lower borrowing costs to encourage consumption. 

Mann said: “High inflation itself is behind scarring, income uncertainty, and weak consumption growth.  

“Therefore, monetary policy needs to continue to focus on reducing inflation to achieve the environment of price stability. 

“Then, households can return to their normal consumption-savings behaviour, which is conducive to stronger consumer demand.” 

Mann’s comments come after the Bank’s nine-strong PC voted 7–2 last month to maintain Bank rate at 4%, with two external doves, Swati Dhingra and Alan Taylor, pressing to cut the interest rate by a quarter point to 3.75%.   

Yesterday, the Bank’s chief economist Huw Pill argued that central bankers should adopt a “conservative” approach to setting interest rates. 

Pill said his speech at the University of Birmingham should not be taken as a comment on the current stance of monetary policy or the economic outlook. 

But he added that central bankers should make clear their commitment to prioritising price stability above wider goals for growth and employment over which they could not exert much long-term influence. 

Pill pointed out: “We should be cautious in assigning monetary policy responsibility for real economic outcomes because, over the longer term at least, all monetary policy can do is determine the nominal dynamics of the economy.” 

He added: “The credible commitment to an aggressive monetary policy response should inflation get out of hand induces behaviour that makes it much less likely that inflation will get out of hand.” 

Money markets do not expect a further base rate cut this year.