An interest rate rise before Christmas is unlikely despite rising energy prices and supply shortages that are expected to push inflation towards 5%, according to the Bank of England policymaker Silvana Tenreyro.
Setting herself against colleagues Michael Saunders and the governor, Andrew Bailey, who have warned in recent weeks that inflationary pressures could warrant a rapid response by the central bank, Tenreyro said it was unclear whether a rise in the cost of borrowing before Christmas would control the escalating price of imported goods.
With the economy already slowing and consumer confidence falling, she predicted a spike in prices over the next few months was likely to prove short-lived, meaning that an interest rate rise would take effect after the prices had begun to come down.
Last month inflation dropped to 3.1% from 3.2% in August, but the Bank’s chief economist, Huw Pill, said the fall would be quickly reversed and by the end of the year be heading back towards 5%.
A steep increase in oil and gas prices and shortages of computer chips were blamed for pushing inflation towards its highest rate of growth for a decade. Food import costs have also increased and some industries have blamed paying higher wages to attract staff as another cost forcing them to put up prices.
Tenreyro said there was evidence that the wide geographic spread of supply lines from the UK to the rest of the world had made the economy more resilient during the pandemic, contrary to some assertions that it made businesses more vulnerable.
While many car manufacturers expected to wait until next year before the supply of computer chips returned to pre-pandemic levels, delaying production, most other goods would soon flow normally, including personal protective equipment destined for the health service.
“A range of temporary factors have been pushing the consumer prices index (CPI) above target, and will continue to do so over the coming months.
“Some of these, such as the direct impact of energy price rises, are short-lived, and monetary policy can do little to offset them,” Tenreyro said, adding: “Much of the effect of policy would not come until after their impact had faded.”
It was more important, she said, to monitor energy prices to see if they eat into disposable incomes and factory costs, a development that would slow economic growth next year.
Investors have bet that the Bank will begin increasing its 0.1% base interest rate – which is the amount it charges other banks to borrow money – at its next meeting in November and again in December.
Tenreyro said that unless there was a major change to the CPI inflation or the outlook for wages, the bank should stick to its plan to raise rates by 0.5% by the end of next year.
She said wages were modest and could fall back in the coming months as about 1 million furloughed workers and 1 million people who have quit the labour market begin to return to jobs or the unemployment register.
“A large number of workers need to be reabsorbed into the labour market over the coming months, some of whom will flow into unemployment.
“The literature on unemployment benefits, which are comparable in effect to the furlough scheme, would suggest that furlough has been boosting underlying wage growth. Its withdrawal could put this process into reverse,” she added.