BoE’s Tenreyro sees case for small increase in rates

Bank of England policymaker Silvana Tenreyro said on Wednesday that she saw a point for higher interest rates to tackle inflation near a 30-year high, but the extent of tightening needed was uncertain.

Financial markets currently price in BoE interest rates reaching nearly 2% by the end of this year, but central bank forecasts at the start of the month showed inflation would undershoot its target if rates reached 1.4%.

Tenreyro, in a speech to be delivered to the National Institute of Economic and Social Research (NIESR), noted that inflation was forecast to fall almost back to target without raising rates above their current 0.5%, and that rates had only been 0.75% before the pandemic.

“This metric would also suggest only a small amount of policy tightening will ultimately be required, reflecting the small share of the overall stimulus in the pandemic provided by monetary policy in the UK,” Tenreyro said.

Government fiscal policy had been the main source of support for Britain’s economy during the pandemic, she said.

Tenreyro voted against the BoE’s rate rise in December, its first since the start of the pandemic, saying she preferred to wait a few weeks for clarity on the impact of the rapidly spreading Omicron variant of coronavirus.

In February she joined the majority in voting to raise rates to 0.5% from 0.25%. “The outlook and the risks had shifted in favour of a more front-loaded tightening,” she said.

“With the inflation pick-up from higher tradeable goods price inflation now set to be larger and likely more persistent than previously expected, I thought an earlier tightening would strike a better balance between inflation and output volatility,” she added.