The causes of the UK’s inflation spike will “fade” and policymakers should avoid being “overly cautious” about cutting interest rates, a Bank of England rate-setter has argued.
Swati Dhingra, a trade expert and external member of the Bank’s monetary policy committee (MPC), rejected the idea that inflation is a “particularly British problem”.
“The effects of the shocks driving the UK’s current high inflation relative to Europe will fade, and thus, we should not be overly cautious about cutting interest rates,” she said.
Recent projections from the Organisation for Economic Co-operation and Development have suggested the UK will have the highest inflation rate in the G7 this year.
But writing in the Times, Dhingra said this reflected short-term factors, including “administered prices” for utility bills and bus fares set by regulators. She also pointed to consumption habits – with Britain’s appetite for chocolate having an impact.
“[Cocoa] prices increased in the UK and the euro area, but were felt more sharply in the UK because chocolate forms a larger share of Brits’ shopping baskets. Differing consumption habits and the timing of the pass-through to inflation have been at play in olive oil and beef prices too,” she said.
Dhingra added that just 10 products account for three-quarters of the gap between food inflation in the UK and the eurozone.
The MPC left interest rates on hold at 4% earlier this month, with Dhingra one of two dissenters who backed a quarter-point cut. Rates have come down five times since last summer but Bank governor, Andrew Bailey, has recently urged caution given the stickiness of inflation, which held steady at 3.8% in August.
While some MPC members have expressed concern about the influence of strong wage growth on inflation, Dhingra suggested this factor has been overplayed.
“Wages in the UK accelerated faster than the eurozone during the pandemic, but since 2024 earnings have been growing at similar rates so can’t explain the recent inflation gap,” she said.
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Dhingra concluded: “We can afford to cut rates further and not put additional strain on economic growth without threatening the inflation target.”
Her views contrast with those of Megan Greene, another external MPC member, who said in a speech earlier this week: “An appropriate response to the uncertainty and risks we are currently facing should involve a cautious approach to rate cuts going forward”.
The MPC next meets to set interest rates on 6 November.