MPC member hails resilience of Northern businesses
Sarah Breeden, deputy governor for financial stability at the Bank of England, left, with Ken Clark, the Bank’s agent for the North West, outside the Opera House in Manchester(Image: Alistair Houghton)
The Bank of England should soon take its “foot off the monetary brake” and cut interest rates as inflation continues to ease, a member of the bank’s rate-setting committee has predicted.
Sarah Breeden, deputy governor for financial stability at the Bank of England and a member of the Monetary Policy Committee (MPC), was in Manchester to hear from businesses about what they would like to see from the Bank. She praised the resilience of Northern businesses – and told BusinessLive that without any further economic shocks, she expected a rate cut could come in the next couple of meetings.
At the most recent MPC monthly meeting last Tuesday, she was one of four members who voted to reduce Bank Rate by 0.25 percentage points, to 3.5%. But the rate stayed at 3.75% as five members voted to keep the rate the same.
The minutes of the MPC meeting showed members felt inflation would soon fall back to its 2% target as pay growth and price inflation were easing, but there was debate over how persistent those inflationary pressures still were, and whether a rate cut was needed now or later.
Like other MPC members, Ms Breeden, who is originally from Stockport, regularly tours the country to talk to businesses about how their sectors are performing. She said those discussions help members get a true picture of the wider UK economy, and help them to state their cases at the MPC table.
Asked why she had voted for a cut in rates, she said she felt it would help give more support to businesses sooner.
She said: “When we, all of us, are looking at interest rates and the path for monetary policy, what we’re looking at is ‘where is inflation going to be in the medium term’.
“We’ve had some really good news recently in that inflation is going to hit our 2% target nine months earlier, 12 months earlier, than we had expected it to. We will be at 2% or thereabouts in April and our expectation is that it should stay there from here.
“But of course there are risks around that outlook and so our debate around the MPC table was about the upside risk to inflation, if we continue to have high wages, if they are fuelling increases in prices.
“On the upside, are we having inflation persistence continuing, versus the risk to the downside? Are we going to see a pick-up in activity as we’re expecting? Might there be more of a loosening in the labour market and might that bring inflation below target?
“For me, I was more focused on those downside risks. I wasn’t confident that we’re going to see that pick-up in activity. And so I thought it was appropriate for us to take our foot off the monetary brake a little bit and provide a bit more support for the economy.”
This time round, Ms Breeden’s argument was outvoted on the MPC. But she says that while “there’s no preset path for policy”, a cut remains likely soon if the economy continues on its current path and risks to inflation subside.
She said: “If we continue to have the economy develop as we expected and if there are no shocks – to be clear those are two big ifs… I think it’s reasonable to expect there to be a cut over the next couple of meetings.”
Ms Breeden was confident though that, without shocks, inflation would continue on its downward trend.
She said: “We’ve had four years, haven’t we, when inflation has been above our target of 2%. That’s a really, really long time.
“The original source of those inflationary shocks were external to the UK economy. It was the almost doubling of energy prices, food prices increased by 20%. And perhaps naturally in that context, people were looking to address the cost of living pressures through higher wages.
“What we’re seeing now is that in contrast to the position then when there was a tight labour market, when it was more likely that businesses were to be able to have high wages and then to pass those higher wages on into their costs, we’re seeing less activity in the economy.
“We are seeing a looser labour market and all of that means that the persistence in wage and price inflation, those second round dynamics that have been with us for a long, should be falling away.”
North West businesses ‘resilient’ in face of shocks from Brexit to pandemic
Her overall feeling was that the mood among local businesses was “resilient”.
She said: “There’s been an awareness of some green shoots, some positive stories to tell, but also a recognition that the story isn’t the same across all industries. The story that manufacturing is facing is different to the one in finance and professional services.
“And that’s something that we find really valuable from coming out and talking to businesses, because the more we understand about why firms are experiencing the economy differently, the better able we are to understand it and make policy right.”
That resilience, she said, was particularly striking given the challenges the UK economy has faced.
She said: “If you think about the shocks that the economy has suffered over the last several years, it’s amazingly resilient that we are where we are. We’ve left the European Union, we’ve had a once-in-a-hundred-year pandemic, we’ve had war in Europe, we’ve had the fastest rise in energy prices in many decades, we’ve had the fastest rise in interest rates in decades, and we’ve had a new leader in the U. And all of that has created shocks that businesses have been able to absorb incredibly well – much better than I would have expected.”
Why MPC members must get out and meet businesses
Ms Breeden said she “cannot underscore enough” the importance to MPC members of getting out to meet businesses in person.
She said: “It’s always important to understand businesses and households’ lived experience of the economy. But after those extraordinary shocks that we’ve faced, it is even more important to get out and about and ask people what is happening with their costs, what’s happening with the labour market, what’s happening with demand, what does all of that mean for pricing – and that feeds in very really very really into our decisions. We can’t just look at our models, we’ve got to look out of the window.”
