A Bank of England rate-setter has warned against “self-defeating” interest rate rises amid signs of a widening split between policymakers as inflation fears mount.
Silvana Tenreyro, a Monetary Policy Committee dove who pushed the case for negative interest rates earlier this year, warned against over-reacting to soaring energy prices and chip shortages which are poised to push the Consumer Prices Index above 4pc until well into 2022.
Ms Tenreyro said: “Typically, for short-lived effects on inflation, such as the big rises in the prices of semiconductors or energy prices, it would be self-defeating to try to respond to their direct effects.
“By the time interest rates were having a major effect on inflation the effects of energy prices would already be dropping out of the inflation calculation.
“If some effects were to prove more persistent it would be important to balance the risks from a period of above target inflation with the cost of weaker demand.”
Semiconductors are an essential component in car manufacturing and mobile phones. Businesses have been battling a severe shortage for more than a year following a boom in demand during lockdowns which has been exacerbated by supply chain chaos.
Ms Tenreyro’s comments put her at odds with the more hawkish shift in rhetoric from Threadneedle St colleagues including the Bank’s chief economist Huw Pill, who last week voiced “great concerns” over inflation.
External member Michael Saunders also told the Telegraph last week that financial market expectations for a “significantly earlier” path of rate rises from the current 0.1pc record low were “appropriate”.
Mr Saunders is concerned over rising wages in a tight jobs market as shortages push a demand for staff to a record level.
But Ms Tenreyro played down the labour market risks after the Government’s furlough scheme, which has shielded the incomes of 1.3m people, ended last month.
She said: “This is a significant and sizeable labour supply that can potentially enter into the market now.”
Her comments came as economists at Credit Suisse warned that British households face the biggest hit to disposable incomes for a decade next year as rising energy bills and tax rises bite.
The investment bank said disposable incomes could fall by 1.5pc next year, the largest drop since 2011 in the aftermath of the financial crisis.
While pandemic savings will support strained households, “we are unlikely to get the rapid recovery in consumer spending that we expected on the back of a falling savings rate”, the bank’s UK economist Sonali Punhani said. Credit Suisse expects a slower pace of action than the wider financial market, which is pricing in interest rates of close to 1pc by the end of next year.
The extent of the looming squeeze was underlined by the Bank of England’s latest credit conditions survey, which showed lenders are braced for rising defaults among households and business over the next three months.
Mortgage default rates are expected to increase, while more small and medium-sized businesses are likely to be unable to repay over the coming quarter, the survey found.