Deputy Governor Dave Ramsden said that the Bank of England must continue raising interest rates to bring inflation back to 2%, even if it means more hardship for households.
Ramsden said that he is concerned about the tight labor market and high inflation expectations, and that he believes further tightening is necessary.
The Bank of England has raised interest rates eight times since December to 3%, with Ramsden in favor of a historic three quarter point increase this month. Markets expect another half-point increase in December.
The Bank of England is under pressure to aggressively tackle inflation, which is currently at 11.1%. However, the Monetary Policy Committee is split over how much more tightening is needed, given the dampening effect on demand of a looming recession.
This month, two members voted to raise rates by less than three quarters of a percent, arguing that the cost of living crisis made the case for a more gradual approach. Real wages are expected to fall by 7% over the next two years.
Ramsden stated that he was more worried the BOE forecast, which illustrated inflation dropping below the target in 2024, might over-estimate the weakness of the economy during a time of continuing labor market tightness and growing inflation expectations.
He is concerned about the possibility of inflationary pressures building up in the economy and wages growing more quickly than expected.
"While the short-term consequences for the UK economy might be challenging, the MPC must take the necessary steps in terms of monetary policy to return inflation to the 2% target sustainably in the medium term," he said.
At the Bank of England Watchers' conference in London, he said that the big fiscal tightening announced in the autumn statement would have very little effect on rates, as most of the measures would not come into effect until the end of the BOE's three-year policy-setting horizon.
Ramsden said that he is skeptical about the depth of the recession that the BOE is predicting. He is also doubtful that unemployment will rise to 5% from the current levels of 3.6%.
"There are many other judgments in the forecasts where the risks are uncertain," he added. The BOE was criticised this week by the Office for Budget Responsibility for assuming that households will not dip into their savings at all during the recession. However, many households are likely to dip into their savings during a recession in order to cover expenses.
Ramsden stated that if his views do not come to fruition, he would reevaluate the situation and potentially lower Bank Rate.
Ramsden said that the risk premia in asset prices that were triggered by Liz Truss's unfunded tax cuts have disappeared. Most of the giveaway was reversed in the face of market turmoil, and her successor, Rishi Sunak, announced £55 billion of tax rises and spending cuts to fill the hole in the public finances.
The UK's reputation has been damaged by the episode, and it will take time to fully restore credibility, Ramsden said.
The Bank of England, the Treasury and the Office for Budget Responsibility are "back in a position where we are being allowed to get on with our jobs," he said.
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