By Paul Hannon

The Bank of England's key interest rate should continue to restrain economic activity to ensure that households and businesses don't act in ways that would prolong a coming pickup in inflation, a member of the Monetary Policy Committee said Tuesday.

Catherine L. Mann on Thursday surprised investors by voting to lower the key interest rate by half of a percentage point, a larger move than that favored by the majority. Mann had on a number of previous occasions voted for a higher rate of interest than that favored by the majority.

Despite that vote, Mann said she favors a key rate that is "well above" the 2% to 3% range that neither spurs nor slows growth, as estimated by BOE economists in 2018. That is commonly known as the "neutral" rate.

"The activist policymaker needs to maintain policy rate discipline and restrictiveness even after this immediate decision," she said Tuesday in a speech in Leeds. "This ensures that, as we move through the inflation hump, expectations remain anchored both in the near and longer term."

Referring to a BOE survey of investors and traders that estimated a longer-term average for the key rate at between 3% to 3.5%, Mann said her preferred level was "more likely at the higher end of that range."

Mann's comments suggest she is unlikely to back many further cuts in the key rate to follow up on her surprise vote. That decision was prompted by the need to "cut through the noise" in response to a stall in borrowing costs for U.K. households and businesses that largely reflected developments in the U.S.

"Financial market volatility coming importantly from international spillovers blurs the signal about the desired stance of monetary policy as well as tempers the transmission of monetary policy to the domestic economy," she said.

Mann said the BOE's two previous cuts "had not appreciably loosened financial conditions."

While lowering its key rate to 4.5% from 4.75%, the BOE last week raised its inflation forecast, and now anticipates a peak of 3.7% later this year as energy prices increase, although it expects that pickup to be short-lived.

Mann said there were signs that the U.K.'s labor market is cooling, while already weak demand will make it difficult for businesses to raise their prices. The BOE estimates that the U.K. economy contracted in the final three months of last year.

"Continued weak demand conditions will lead to a further loosening of the labor market," she said. "Even if near-term inflation expectations firm on the back of the inflation hump, these factors likely will restrain pass-through to wages and prevent second-round effects from setting in."

Write to Paul Hannon at paul.hannon@wsj.com

(END) Dow Jones Newswires

February 11, 2025 04:32 ET (09:32 GMT)

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