A Bank of England rate-setter said she expects to back “gradual” interest rate cuts this year due to continued uncertainties about the economic outlook.
Speaking in Edinburgh, Sarah Breeden said inflation had come down faster than expected throughout 2024, which will enable the Bank to continue lowering borrowing costs.
“The recent evidence further supports the case to withdraw policy restrictiveness and I expect to continue to remove restrictiveness gradually over time,” she said
Breeden said that her primary concern when she joined the Monetary Policy Committee (MPC) a year ago was that inflation might become “entrenched” due to strong demand in the economy.
“It is clear to me that the risk of that upside scenario has now subsided sufficiently to no longer be a core consideration in setting policy,” she said.
Breeden said it was “increasingly clear” that economic momentum had taken a hit in recent months, but it was unclear whether this was primarily due to supply issues or weak demand.
Growth unexpectedly contracted in October for the second month in a row and the Bank of England thinks that the economy was stagnant in the final quarter of 2024.
Weaker demand was likely a more important factor during the third quarter, she said, but supply constraints may have become more influential towards the end of the year.
“I will be focused in particular on further diagnosing how much of the slowdown in activity in the economy can be attributed to supply and how much to demand given their differing impacts on the medium-term outlook for inflation,” she said.
Business responses to the Budget will also play an important role in determining the extent to which rates can be cut, she said.
Firms face extra costs both from higher payroll taxes and an increase in the minimum wage, but at this stage it is still unclear how they will respond.
Surveys suggest that a majority of firms are planning to hike prices in the coming year in order to protect their margins, but their ability to pass on costs will also depend on the wider demand environment.
With these uncertainties in mind, Breeden said it was “difficult to know” how fast interest rates should be cut.
Breeden voted with the majority on the MPC to hold interest rates at 4.75 per cent in December, but three rate-setters called for another cut.
Financial markets expect the Bank to cut interest rates just twice in 2025 due to lingering fears about the persistence of inflation.
