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Companies will struggle to raise prices this year as consumers are hit by job losses and spending softens, according to a Bank of England rate-setter who argues the central bank should have cut interest rates more aggressively last week.
Catherine Mann said she voted for a jumbo half-point cut last week because of a weakening jobs market and slowing consumer demand that is dampening businesses’ pricing power and therefore inflationary pressures.
Mann had previously been the most hawkish BoE policymaker and opposed last year’s rate reductions because of persistent inflation risks.
“Demand conditions are quite a bit weaker than has been the case — and I have changed my mind on that,” Mann said in an interview with the Financial Times.
“I can see pricing coming very close to [2 per cent] target-consistent [levels] in the year ahead,” she added, warning that the data is pointing to a “non-linear” fall in employment.
Mann, an external member of the BoE’s Monetary Policy Committee, distanced herself from the central bank’s “gradual” approach to rate reductions, saying a half-point move had been needed to “cut through the noise” and make clear to traders the need for easier financial conditions.
“To the extent that we can communicate what we think are the appropriate financial conditions for the UK economy, a larger move is a superior communication device, in my view,” Mann said.
The BoE on Thursday announced a quarter-point rate reduction to 4.5 per cent, but Mann and her colleague Swati Dhingra both called for a larger, half-point cut.
Huw Pill, the BoE’s chief economist, on Friday distanced himself from that approach, saying he would not be “rushing” into sizeable rate reductions.
While Dhingra has for some time been seeking a more rapid easing than the bulk of the MPC, Mann has until recently been at the opposite end of the spectrum.
In 2023 she called for rates to be lifted to 5.5 per cent — a quarter-point above the high point following the inflation surge.
She opposed the MPC majority decision to trim the key rate to 5 per cent in August and was the sole opponent of November’s move to reduce it to 4.75 per cent.
Despite her change of stance, Mann cautioned that her vote last week reflected her desire for a one-off step-change rather than a longer-term succession of ongoing rate reductions.
The BoE expects a pick-up in consumer price inflation to 3.7 per cent in the second half of this year, driven by factors including higher energy prices.
Mann said the central bank needed to ensure this increase did not result in companies agreeing to accept higher wage demands, which could fuel inflation.
“I have to ensure that those second-round effects do not emerge. And I will need some more data to make that judgment,” Mann said.
Nevertheless, Mann said that she expects a weakening UK consumer to lead to “a lack of pricing power”.
Soft demand conditions are “starting to bite” and undermine companies’ capacity to pass through cost increases in areas including catering, hospitality and holidays, she said.
Companies whose labour costs were likely to be driven up by the government’s decision to raise the minimum wage and employer national insurance contributions were meanwhile showing “dramatically changed” employment intentions, she said.
This pointed to “non-linear adjustments in labour demand,” she said. “Workers may want those wage increases, but firms are not going to be able to pay, because they will not be able to pass it through.”
Mann added: “If there is a non-linear adjustment in employment, that causes less demand because fewer people are employed. And then that leads to moderating pricing power of firms.”
The weaker demand was a reflection of continued caution among consumers despite rising real incomes, with inflation-adjusted wages increasing 2.5 per cent in the September to November period last year.
Last year, Mann said she had been suggesting that high savings were “dry powder” that could feed stronger consumption, but this not materialised.
A monthly survey by KPMG and the Recruitment & Employment Confederation on Monday pointed to the most widespread weakening in demand for staff since August 2020, when the UK grappling with the Covid pandemic.
