BoE’s known dove, Swati Dhingra, reinforced her stance on the necessity for a rate cut in her speech today, underscoring a cautiously optimistic inflation outlook and highlighting concerns over living standards and consumption.
Dhingra described the trajectory of headline inflation as “bumpy but downwards,” emphasizing that consumer price inflation has been on a “firm downward path” for some time, with expectations of further declines. This perspective is supported by producer price inflation trends, which typically precede changes in consumer prices, suggesting that the easing of inflation pressures is set to continue.
She also raised concerns over the “downside risks to living standards” that could result from maintaining tight monetary policy stance. She pointed out that, despite reduction in inflation rates and some recovery in real wages, consumption in the UK remains subdued, still “below its pre-pandemic level.” This situation presents a “striking contrast” to Eurozone and US, where consumption has already rebounded.
In her critique of the current policy direction, Dhingra argued against the inclination to err on the side of overtightening monetary policy. She cautioned that such an approach often leads to “hard landings and scarring of supply capacity,” which could further deteriorate living standards.
FOMC minutes: A majority hesitant on swift monetary easing
The latest FOMC minutes reveal a predominant caution against premature easing of monetary policy. The document underscores a consensus among “most participants” over the potential risks of reducing interest rates too hastily, expressing a preference for delaying cuts rather than risking the need to reverse course.
During the FOMC meeting held on January 30-31, the discussion emphasized that participants did not anticipate it being appropriate to lower the federal funds rate target range without “greater confidence” that inflation was on a sustainable path back to 2% target. The determination of the future policy rate path was tied closely to “incoming data, the evolving outlook, and the balance of risks.” .
Although the balance of risks towards employment and inflation goals was seen as “moving into better balance”, participants remained “highly attentive to inflation risks”. While upside risks to inflation have “diminished”, inflation remains above target. This vigilance is framed within a broader context of concern that “progress toward price stability could stall”, particularly in scenarios where demand strengthens unexpectedly or supply-side improvements falter.
The predominant narrative within the FOMC leans towards a cautious approach to policy easing, with “most participants” underscoring the perils of “moving too quickly” and the importance of a meticulous evaluation of incoming data to ascertain whether inflation trends align with the target sustainably. In contrast, only “a couple of participants” raised concerns about the economic downsides of an “overly restrictive stance” persisting for an extended period.
Full FOMC minutes here.