The deputy governor of the Bank of England said he was “very aware” that raising interest rates is adding to the hardship of millions of households and businesses amid the cost of living crisis.
Dave Ramsden said his “bias” is towards more rate hikes, but that he would consider rate cuts when runaway inflation is no longer a problem.
Mr Ramsden addressed the Bank of England Observers Conference, organized by the Macro Money Finance Society and King’s Business School at King’s College London, on the uncertain and unpredictable UK economy.
He said: “2022 has been a very challenging year for the UK economy. The cost of living crisis has left millions of households and businesses in dire straits.
“As a member of the Monetary Policy Committee (MPC), I am well aware that our actions add to the difficulties caused by the current situation.
“As challenging as the near-term implications for the UK economy may be, the MPC must take the necessary policy steps to rein in inflation and achieve the 2% target on a sustainable basis over the medium term.”
The UK Consumer Price Index (CPI) inflation rate hit 11.1% in October as rising food and energy prices pushed up the average cost of living.
The Chancellor’s autumn statement, presented last week, should help bring inflation down over the long term as fiscal measures will limit household spending.
In addition, the Government’s Energy Price Guarantee (EPG), which caps average electricity bills at £2,500 by April 2023 and £3,000 by April 2024, will reduce CPI inflation in the short term as people pay their bills less.
But in the longer term, the EPG will provide more financial support for household income and demand, which encourages people to spend and thereby push up inflation, Ramsden said.
He added: “The autumn statement also included a number of measures that will significantly tighten fiscal positions over the medium term and dampen economic activity and inflation.
“However, the vast majority of these measures will not come into effect until April 2025 and will therefore have very little impact over the MPC’s three-year forecast horizon compared to what was assumed in the November MPC.
“The MPC will be able to fully consider the fall statement and its February forecast in its December policy round.”
Mr Ramsden said the bank’s policy decisions, which have raised interest rates at every meeting since March 2020, were necessary “in a world of heightened uncertainty”.
He continued: “We have been raising bank rates very rapidly over the past year and based on past experience, a change in interest rates only has its biggest impact on inflation after about 18 to 24 months.
“But it’s possible that the increased proportion of households with fixed-rate mortgages will mean that the full impact of the policy will take longer and/or be larger if that is the case, causing inflation to fall more quickly into 2023.”
Interest rates were hiked 0.75 percentage points from 0.25% to 3% in November, the largest single hike since 1989.