Higher interest rates will strengthen household spending, Bank policymaker says

Interest rates need to stay higher for longer to bring UK inflation down to its 2% target and therefore strengthen consumer spending, a Bank of England policymaker has said.

Catherine Mann said it may seem “counterintuitive” to keep borrowing costs higher in order to boost growth, but it is necessary in light of persistent inflation.

Ms Mann, who is an external member of the Bank’s Monetary Policy Committee (MPC), was discussing concerns about weak consumption among UK households which was weighing on overall economic growth.

She said in a speech at a Resolution Foundation event: “If the consumption gap was my only concern, reducing the restrictiveness of monetary policy would be appropriate.

“However, in light of elevated inflation and expectations, maintaining restrictiveness for longer would be appropriate.”

Restrictive monetary policy refers to interest rates being kept at higher levels.

UK rates were held at 4% at the Bank’s last meeting in September, with Governor Andrew Bailey saying the UK was “not out of the woods” on inflation.

The UK’s overall inflation rate is nearly twice the Bank of England’s target level, at 3.8% in August, according to the latest official figures.

Food and drink price rises have accelerated for five months in a row.

UK prices are now 30% higher than they were before the 2021-2022 inflation surge, Ms Mann pointed out.

“This means that UK households have experienced 12 years of inflation in a little over two years.”

“It is perhaps counterintuitive that in order to create an environment conducive to growth, monetary policy must remain restrictive for longer,” she said.

“But this is necessary to bring inflation sustainably back to our 2% target in the medium term.”

The economist said this would mean households can return to normal consumption and saving behaviour, and be able to spend money without paying attention to inflation.

This, in turn, would help strengthen consumer demand.