Interest rates may need to start falling again if cost-of-living pressures ease faster than the Bank of England expects, a senior policymaker told Threadneedle Street.
Dave Ramsden, one of the bank’s deputy governors, said he currently supports new increases in the cost of borrowing, but pointed to the possibility that a weakening economy will require a cut.
“Given the uncertainties we face, it is important to also be humble about what we don’t know or have yet to learn. I favor a vigilant and responsive approach to policy making,” said Ramsden.
“While my preference is for further tightening, if the economy develops differently than I expected and continued inflation is no longer a concern, I would consider lowering bank rates where appropriate.”
Ramsden’s comments came as the latest snapshot of production from the CBI predicted Britain’s factories facing a harsh winter.
The employers’ lobby group said it expects the increase in output over the next three months to be short-lived as both domestic and export order books were below normal for the time of year.
Anna Leach, CBI’s deputy chief economist, said: “The increase in manufacturing output this month appears to be driven at least in part by improvements in supply chains, with several companies reporting that they were able to fulfill orders as materials and components became more readily available.
“However, the overall order book remained much weaker than earlier this year and production is expected to fall again in the coming quarter.”
The Threadneedle Street Monetary Policy Committee (MPC) has been steadily raising 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 indicated he would vote to raise rates when the MPC meets again next month, he became the latest committee member to highlight the risks that too tight a policy 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.
Ramsden said: “I am not yet confident that domestic inflationary pressures from higher costs and corporate pricing pressures are beginning to ease. It is encouraging that survey and market-based inflation expectations for the medium term have fallen from their peak, although they remain elevated.
“Assuming the economy develops broadly in line with the latest MPR in the near term [monetary policy report] projections and given my assessment of the balance of risks, I expect that further increases in bank rates will be necessary to ensure inflation returns to target sustainably.
“Significant uncertainties remain around the outlook and if the outlook points to continued inflationary pressures, I will continue to vote to react strongly.”
Signs that the US Federal Reserve intends to slow the pace of rate hikes next month weakened the dollar and pushed the pound above $1.20 on Thursday, its highest level in three months.