Keeping rates high for too long ‘could pull inflation below target’

Maintaining high interest rates for too long could hit jobs and drag inflation below target levels, a deputy governor of the Bank of England has warned.

Sarah Breeden, the Bank’s deputy governor for financial stability, said economic output could also be affected.

In a speech to Cardiff Business School, she said: “Holding policy too tight for too long comes with costs to output and employment, which could then pull inflation below target.”

Policymakers at the central bank voted to hold interest rates at 4% earlier this month.

The deputy governor was among members of the nine-strong committee to vote in favour of the hold.

Expectations for a cut in the coming months have also recently cooled amid concerns over rising inflation.

Rate-setters at central banks typically keep interest rates – which affect borrowing costs for mortgages and other loans – at elevated levels in order to bring down inflation.

Ms Breeden said on Tuesday that inflation is “too high”, amid forecasts that it will increase to a peak of 4% this month.

However, the Bank of England has predicted that it will then steadily decline amid efforts to bring it back to the 2% target rate set by the Government and the Bank.

Ms Breeden said she believes the current uptick in inflation, which has been partly driven by higher food costs, is a “hump” which should ease.

“I do not see evidence that the disinflation process is veering off track,” she said.

“Instead it remains my central case that the ‘hump’ will prove just a bump in the road.”