(Bloomberg) -- Bank of England policymaker Swati Dhingra warned that high interest rates are bearing down too heavily on the economy by curbing consumer spending and business investment.
“We have a very restrictive stance at the moment,” the external member of the Monetary Policy Committee said in an interview with Bloomberg TV Friday. “The weak consumption, the weak investment, and possible damage to supply capacity is what I would worry about, and that’s why I think we should be easing policy more.”
Dhingra is the MPC’s most dovish member, voting for rate cuts since February. The BOE lowered borrowing costs by a quarter-point first in August to 5% and again last month to 4.75% as it reverses policy now that inflation has dropped back close to the 2% target.
Dhingra said she prefers “gradual” rate cuts and expects policy to settle at between 2.5% and 3.5%, which is her estimate of the “neutral rate” that is neither restrictive nor stimulatory. “I’m willing to buy the argument that the neutral rate has risen to some degree” since the BOE’s last estimate of 2%-3% in 2018, she said.
The BOE’s next policy decision is on Dec. 19, when markets expect the committee to leave rates unchanged. They put an 80% chance of another quarter-point cut in February. “We’ve actually seen wage pressures come down, we’re seen services continuing to ease,” Dhingra said. “Bank Rate has to ease as a result.”
She added that high interest rates are “weighing on living standards, on supply capacity and investments, and that’s why we need to start to take that away to some degree, so that we start to get normalization back into the economy.”
Dhingra, a trade expert and associate professor at the London School of Economics, also warned that a re-escalation in the global trade war with Donald Trump as US president would hit productivity. Trump plans tariffs on Mexico, China and Canada and has threatened them on the European Union.
Productivity Loss
A global trade war would hit UK productivity and undo any benefits from cheaper goods being diverted from China and elsewhere to Britain, she said. Because weaker productivity reduces the capacity of the economy, lower prices would prove just as inflationary as at present, she explained.
A trade war “might come at a pretty substantial productivity loss,” Dhingra said. “In that case, expecting businesses to rewire so quickly is asking a lot. So I don’t think it necessarily is going to make my job easier. It might make my job easier for a month or two months, but not necessarily over a two or three year horizon.”
A trade war would have only a “limited” direct impact on the UK in growth and inflation but the indirect effects would be far more damaging.
“In principle, we could be beneficiaries in terms of lower prices,” she said. “But equally, if all of us start rushing to the same alternative exporters - if we want to move away from, say, Chinese exporters supplying us those products - then we all end up basically crowding to one source of supply and could end up in very much the same kind of world we’ve seen in the past few years of supply chain disruptions.”
©2024 Bloomberg L.P.
