BOE Policymaker Dhingra Claims that Slow Rate Cuts would Hurt the Economy

Swati Dhingra, a Bank of England policymaker, has elaborated on her decision to call for interest rate cuts, saying that even a "gradual" approach would leave monetary policy as a drag on the economy this year.

In her first public remarks since she and Catherine Mann voted for a half-point rate cut on February 6, Dhingra said consumer spending was likely to remain weak and inflationary pressures low. 

Dhingra and Mann were outvoted by the rest of the Monetary Policy Committee in favor of a quarter-point cut to 4.5%, with Governor Andrew Bailey stating that officials would take a "gradual and careful" approach to further easing. Money markets have only fully priced in two more cuts this year.

"So even if you thought of a gradual definition of 25 basis points per quarter, you would still pretty much, according to most metrics, be in restrictive territory all of this year," Dhingra said at the University of London on Monday. "I am worried about the tickup that's coming, largely because this happens to be in pretty salient items," yet she continued: "consumption remains pretty weak, so we're not seeing that resurgence of inflationary pressures."

Her comments came just hours after she was appointed to a second three-year term on the MPC, where she has consistently taken a dovish stance. Mann, however, surprised investors by calling for a 50 basis-point cut, despite being the most hawkish member.

Policymakers face a difficult outlook, with the economy stagnating and inflation returning amid rising energy prices. It hit a higher-than-expected 3% in January and is expected by the BOE to reach 3.7% in the third quarter, nearly doubling the 2% target. The central bank does not expect "second-round" effects on wages and prices, but they cannot be ruled out. Dhingra was sanguine.

"They look like there's more inflation in the system than if you were to look at the really disaggregate numbers," she said. When housing is excluded, "pretty substantial disinflation" in service producer prices occurs. 

Dhingra claims there is clear evidence that the labor market is cooling. Insolvency statistics "are starting to suggest that small businesses are suffering more than the average," she said. Job losses are likely in retail and hospitality, where vacancy rates are lower than pre-Covid levels.

While wages have risen, consumption has not, suggesting "something has changed somewhere along the way." Household savings are not "chasing" goods and services.

"Consumption weakness isn't going away," Dhingra explained. "We basically aren't recovering fully and I think that's the reason that I have been much more on the side of wanting to reduce the level of restriction that we see in the economy," she added.

"I think two things we can all pretty much agree on is there is a fair amount of restriction in the system, and that the disinflation process doesn't look like it's derailed." Dhingra spoke at the Birkbeck Centre for Applied Economics.