"The restrictive stance of monetary policy is expected to continue weighing on economic growth and living standards for more time, even if moderation starts now."
Swati Dhingra has revealed why she voted to lower interest rates at the Monetary Policy Committee's most recent meeting, emphasising the developments in prices and the striking weakness in consumption, which has not recovered to its pre-pandemic level.
Two members voted to increase Bank Rate by 0.25 percentage points, while Dhingra called for a reduction in Bank Rate of 0.25 percentage points - the first vote for a cut since the pandemic started almost four years ago.
Discussing the reasoning behind her vote to "start normalising Bank Rate", she argued that monetary policy "needs to be forward-looking because moderation of the policy stance requires time to implement and to feed through to the real economy".
Twelve-month CPI inflation remains above the MPC’s 2% target but declined from a peak of over 10% in early 2023 to 4% in December 2023.
She described the outlook for headline inflation as "bumpy but downwards", stating that consumer price inflation is on a firm downward path, "and has been for some time now".
Dhingra also discussed the downside risks to living standards from keeping policy tight. Despite an easing in inflation and some real wage recovery, consumption remains below its pre-pandemic level, in contrast to the Euro area and the United States where consumption bounced back some time ago.
She continued: "The evidence to err on the side of overtightening is not compelling in my view as it often comes with hard landings and scarring of supply capacity that would weigh further on living standards."
Discussing the arguments for waiting longer to begin reducing rates, Dhingra said: "The data suggests we are approaching the last mile of this inflationary episode but there are naturally reasons to be cautious because of the unprecedented nature of this episode. Turning to the remaining arguments for waiting longer to moderate Bank rate, one is the risk of losing credibility by having to reverse policy if inflation does not return sustainably to target because of embedded persistence or other shocks to the economy. The logic that has been emphasised several times in this tightening cycle is that the last mile is often the hardest. As inflation recedes from an elevated level, premature loosening could keep it sticky at above-target rates."
However, as a counterargument, Dhingra noted that historical evidence from periods of high inflation suggests that successfully resolving high inflation required a median length of three years. "Going by this, the current episode is already at this point", she added.
Concluding, Dhingra said: "The restrictive stance of monetary policy is expected to continue weighing on economic growth and living standards for more time, even if moderation starts now. In my view, the evidence to err on the side of overtightening is not compelling as it often comes with hard landings and scarring of supply capacity."
