Interest rates may have to fall again if pressures on the cost of living ease faster than the Bank of England expects, a senior Threadneedle Street policymaker said.
Dave Ramsden, one of the bank’s deputy governors, said he currently advocates another hike in borrowing costs but pointed to the possibility that a slowing economy could necessitate a cut.
“Given the uncertainties we face, it’s important to also be humble about what we don’t know or have yet to learn. I prefer an alert and responsive approach to policy-making,” Ramsden said.
“While I am leaning towards further tightening, if the economy performs differently than expected and persistent inflation is no longer a problem, I would consider cutting interest rates if appropriate.”
Ramsden’s comments came as the CBI’s latest manufacturing snapshot predicted that UK factories would face a harsh winter.
The employers’ lobby group said it expects any increase in production over the three months to be short-lived as both domestic and export order books for the season are below normal.
Anna Leach, CBI Deputy Chief Economist, said: “The increase in manufacturing output this month appears to have been at least partly due to improvements in supply chains, with several companies saying they have been able to fulfill orders as materials and components have become more readily available.
“However, overall order books remained much weaker than at the start of the year and production is expected to fall again in the coming quarter.”
Threadneedle Street’s Monetary Policy Committee (MPC) has steadily hiked interest rates from a record low of 0.1% to 3% since last December and financial markets are currently expecting official borrowing costs to peak at 4.5%.
While Ramsden signaled he would vote for rate hikes when the MPC reconvenes next month, he became the latest committee member to point to risks that excessive tightening could lead to a deep recession.
At the November meeting, only seven of the nine MPC members supported a 0.75 percentage point increase, with Silvana Tenreyro and Swati Dhingra voting for smaller increases.
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Ramsden said: “I am not yet confident that domestically generated inflationary pressures from increased costs and corporate pricing pressures will start to ease. Encouragingly, survey and market-based medium-term inflation expectations have fallen from their peak but remain elevated.
“Assuming the economy evolves broadly in line with the latest MPR for the foreseeable future [monetary policy report] Based on forecasts and my assessment of the risk balance, I believe further interest rate hikes will be needed to ensure inflation returns to target on a sustainable basis.
“Significant uncertainties remain about the outlook and if the outlook points to more persistent inflationary pressures, I will continue to vote to respond vigorously.”
Signs that the US Federal Reserve is planning to slow the pace of rate hikes next month weakened the dollar, pushing the pound above $1.20 on Thursday, its highest level in three months.
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