Fall in UK rate curve shows markets more upbeat than BoE, Ramsden says

By David Milliken

LONDON (Reuters) -Bank of England Deputy Governor Dave Ramsden said on Friday the poor health of the supply side of Britain’s economy reinforced his view that interest rates will need to stay restrictive for some time.

In a speech on the economic outlook, Ramsden noted that financial market predictions for interest rates appeared to embody a more positive view of the British economy’s supply capacity than the BoE had.

The supply side of the economy includes the availability of workers and the terms of trade. When they are damaged – for instance by pandemics, financial crises or government policy – it limits how fast an economy can grow before generating inflation.

“Our tight labour market is based on much more subdued growth in demand and very little growth in supply, and that does have consequences for monetary policy,” Ramsden said in a question and answer session following a speech.

“I think that weakness of supply is a real feature of the UK.”

While BoE rate-setters have repeatedly stressed the need for rates to stay restrictive for some time, financial markets show a 25-basis point cut in the Bank Rate is almost fully priced in by mid-2024, with two more to follow by the end of next year.

Despite this, markets on average expected faster growth, slower inflation and less unemployment than the BoE, Ramsden said.

“The pattern of differences would be consistent with outside forecasters being more positive about the outlook for supply and therefore for the output-inflation trade-off than the MPC,” Ramsden said.

Ramsden repeated the BoE’s view that interest rates would need to stay restrictive for some time.

“I continue to characterise my approach to monetary policy as being watchful and responsive,” he said.

Official data this week showed a larger fall in inflation than the BoE had expected, as well as softer wage growth.

“But services inflation remains very high at 6.6%, which indicates more persistence in inflationary pressures,” Ramsden said in his speech.

Still, he had become less worried about a de-anchoring of inflation expectations in Britain.

“As the degree of uncertainty has eased somewhat and policy has become increasingly restrictive I am less concerned than I was about medium-term inflation expectations becoming de-anchored,” Ramsden said.

(Reporting by David Milliken and Andy Bruce; Editing by William James)