Rates should not rise further due to ‘overtightening’ risks – Bank policymaker

Further rises in interest rates risk hurting the weakened economy and adding unnecessary pain to already stretched households, a Bank of England policymaker has warned.

Swati Dhingra – one of nine members of the Bank’s rate-setting committee – said “overtightening” of interest rates poses more of a risk to the economy than home-grown inflation pressures, such as wage rises.

In a speech at the Resolution Foundation think tank, Ms Dhingra said she believes rates should remain on hold at 4% while the flurry of hikes since the end of 2021 filter down to the economy and as inflation begins to ease back.

She was one of two Monetary Policy Committee (MPC) members who were outvoted in calling for rates to be held at the February meeting.

She said: “Overtightening poses a more material risk at this point, through potential negative impacts from increased borrowing costs and reduced supply capacity going forwards.

“It risks unnecessarily denting output at a time when the economy is weak and deepening the pain for households when budgets are already squeezed through energy and housing costs.

“Recent research indicates the persistent scarring effects of deep contractions associated with monetary policy tightening and energy market disruptions, indicating the harmful consequences of overtightening.”

She added: “A prudent strategy would hold policy steady amidst growing signs external price pressures are easing, and be prepared to respond to developments in price evolution.”

The economist also said she believed that worries over domestic inflation pressures have been overblown.

“Overall, the magnitude of domestically generated inflation is if anything likely to be smaller than we estimate,” she said.

Given that the energy bill hikes are set to start falling out of the inflation calculation, and with wholesale gas and electricity prices dropping sharply, the overall level of inflation is expected to pull back to around 4% from 10.1% currently by the year end.

But other members of the MPC – including governor Andrew Bailey – have recently hinted that rates may need to continue rising to keep wages and prices in check.

The Bank will next meet on March 23 to decide on rates.