Swati Dhingra, one of the external members of the Bank of England’s Monetary Policy Committee, made the case on Wednesday for holding UK interest rates at 4 per cent.
The vast majority of inflation had been caused by higher energy and import prices, she said, adding that the evidence of an impending wage price spiral was thin. She pointed to weak consumption as evidence that inflation would soon fall sustainably.
“In my view, a prudent strategy would hold policy steady amid growing signs external price pressures are easing, and be prepared to respond to developments in price evolution. This would avoid overtightening,” Dhingra said.
Dhingra has been one of the more dovish members of the MPC since coming on to the interest rate-setting committee in September last year.
She has dissented from the majority in each of the four meetings, only voting to raise rates once in November and then by 0.5 percentage points rather than the majority vote for a 0.75 percentage point increase.
Her views are unlikely to swing the whole committee, but are not far out of line with comments last week by Andrew Bailey, BoE governor, that he had still no presumption a further rate rise was necessary.
“I would caution against suggesting either that we are done with increasing bank rate, or that we will inevitably need to do more,” the governor said, contrasting his view with financial markets that expect three more interest rate rises.
Dhingra’s difference with the rest of the committee, she explained, was that she thought there was significant evidence that the prices of domestic goods and services were heavily influenced by higher energy and import prices. This applied to heating in restaurants or the energy used to make a loaf of bread, she said.
While examples such as these, “may appear to be purely domestic measures because most consumers do not import them, final consumption is no longer the dominant channel for international trade”, Dhingra said.
She added that “over 70 per cent of CPI inflation in 2022 could be accounted for by increases in energy and import prices”.
Casting doubt on the importance of measures such as core inflation, excluding food and energy prices, as a guide to domestic inflationary pressure, Dhingra said there was still a risk that wage pressures would leave inflation too high for too long.
But economic weakness would guard against that, she thought, and the larger risk was that the BoE raised interest rates too much.
“Even after a year and a half of above-target inflation, there is little evidence for such cost-push inflation [in wage and price pressures] beyond what might be expected following an unprecedented terms of trade shock,” Dhingra said, explaining her view that inflation was likely to come down and it was better not to raise rates further to prevent inflation dropping too far beneath the BoE’s 2 per cent target in the medium term.
