Keeping rates high for too long โ€˜could pull inflation below targetโ€™


Maintaining high interest rates for too long could hit jobs and drag inflation below target levels, a deputy governor of the Bank of England has warned.

Sarah Breeden, the Bankโ€™s deputy governor for financial stability, said economic output could also be affected.

In a speech to Cardiff Business School, she said: โ€œHolding policy too tight for too long comes with costs to output and employment, which could then pull inflation below target.โ€

Policymakers at the central bank voted to hold interest rates at 4% earlier this month.

The deputy governor was among members of the nine-strong committee to vote in favour of the hold.

Expectations for a cut in the coming months have also recently cooled amid concerns over rising inflation.

Rate-setters at central banks typically keep interest rates โ€“ which affect borrowing costs for mortgages and other loans โ€“ at elevated levels in order to bring down inflation.

Ms Breeden said on Tuesday that inflation is โ€œtoo highโ€, amid forecasts that it will increase to a peak of 4% this month.

However, the Bank of England has predicted that it will then steadily decline amid efforts to bring it back to the 2% target rate set by the Government and the Bank.

Ms Breeden said she believes the current uptick in inflation, which has been partly driven by higher food costs, is a โ€œhumpโ€ which should ease.

โ€œI do not see evidence that the disinflation process is veering off track,โ€ she said.

โ€œInstead it remains my central case that the โ€˜humpโ€™ will prove just a bump in the road.โ€

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