Jonathan Haskel, a member of the Bank of England’s Monetary Policy Committee (MPC), said interest rates should be held at 5.25% until there is more certainty that inflation pressures have “subsided sustainably.” In a speech to be delivered on Monday, Haskel urged caution due to concerns over the UK’s job market and worker shortages. While there are “considerable encouraging signs” that inflation is falling, Haskel said the rate would remain above the 2% target “for quite some time.” He stated, “The labor market continues tight, and I worry it is still impaired. I would rather hold rates until there is more certainty that underlying inflationary pressures have subsided sustainably.”
Financial markets have priced at roughly 60% chance that rates will be cut next month for the first time since 2020.
However, Haskel, who voted to hold rates in June, emphasized the ongoing economic challenges. “The playing out of those shocks through the economy, and the continued tight and impaired labor market, means that inflation will remain above target for quite some time,” he wrote in his speech. Higher borrowing costs have added to financial pressures on household budgets, already stretched by higher energy and food bills.
The Bank of England, which is independent of the government, aims to keep inflation stable at 2%.
Interest rate caution amidst inflation
In recent years, the Bank has maintained high interest rates in response to high inflation, which can also drag on economic growth as businesses may delay investment or hiring.
The UK still has a lower percentage of people of working age in employment than before the Covid pandemic. Worker shortages can impact inflation, as employers may raise wages to attract and retain staff, increasing prices for goods as businesses cover higher costs. Some mortgage lenders are factoring in a potential drop in the benchmark rate as part of broader considerations when setting interest rates on new fixed deals to remain competitive yet manageable.
Nationwide and Virgin have become the latest to reduce their rates, with the former cutting rates by up to 0.3 percentage points on Tuesday. Haskel, an external member of the Bank’s MPC and a professor of economics at Imperial College Business School, emphasized the ongoing economic challenges. His term on the MPC is due to end on 31 August.
