Dave Ramsden, Deputy Governor for Markets and Banking at the Bank of England, attends a press conference on interest rates at the Bank of England in London, Britain on November 2, 2023. HENRY NICHOLLS/Pool acquire license rights via REUTERS
LONDON, Nov 17 (Reuters) – Bank of England deputy governor Dave Ramsden said on Friday that the poor health of the supply side of the British economy reinforced his view that interest rates need to remain restrictive for some time to come.
Speaking on the economic outlook, Ramsden noted that financial market interest rate forecasts appeared to reflect a more positive assessment of the supply capacity of the UK economy than the BoE.
The supply side of the economy includes the availability of labor and terms of trade. When they are damaged – for example by pandemics, financial crises or government policies – this limits the speed at which an economy can grow before inflation occurs.
“Our tight labor market is based on much more subdued demand growth and very low supply growth, and that does have consequences for monetary policy,” Ramsden said in a question-and-answer session following a speech.
“I think the lack of supply is a real feature of the UK.”
While BoE rate setters have repeatedly stressed the need to keep rates restrictive for some time, financial markets show that a 25 basis point cut in the key rate by mid-2024 is almost fully priced in, with two more to come by the end of the next year.
Still, markets on average expected faster growth, lower inflation and lower unemployment than the BoE, Ramsden said.
“The pattern of differences would be consistent with external forecasters being more positive than the MPC about the outlook for supply, and therefore the trade-off between output and inflation,” Ramsden said.
Ramsden reiterated the BoE’s view that interest rates need to remain restrictive for some time.
“I continue to characterize my monetary policy approach as vigilant and responsive,” he said.
Official data this week showed a sharper fall in inflation than the BoE expected and weaker wage growth.
“But service sector inflation remains very high at 6.6%, suggesting more persistent inflationary pressures,” Ramsden said in his speech.
Still, he was less worried about an unanchoring of inflation expectations in Britain.
“As uncertainty has eased somewhat and policy has become more restrictive, I am less worried than before about medium-term inflation expectations becoming unanchored,” Ramsden said.
reporting by David Milliken and Andy Bruce; Edited by William James
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