UK interest rates setter Swati Dhingra warns on hard landing

They even gave the impression of being keen to play down the fact the UK had fallen into recession.

Mr Bailey told MPs that the recession, by historical standards, “is the weakest by a long way”.

Mr Broadbent said the definition of a recession used in the UK (two consecutive quarters of falling output) was “unhelpful”, pointing out other countries such as the US calculate it differently.

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External Bank of England Monetary Policy Committee member Swati Dhingra, who voted alone for a cut in UK base rates at the MPC’s meeting which ended on January 31, struck a very different tone in a speech on Wednesday.

Ms Dhingra highlighted various points of weakness in the UK economy.

She said: “Despite an easing in consumer price inflation and recent real wage recovery, consumption remains weak. Consumption has not recovered to its level before the pandemic. This is in sharp contrast to the robust growth seen in the US and the recovery in the euro area since 2022.

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“Consumption has grown by 12.3% in the US from December 2019 to September 2023 and recovered by 2.17% in the euro area. Consumption in the UK for December 2023 was still 2.25% lower than that in 2019. This is unsurprising because there was a sharper rise in utility bills in the UK and they stayed at their peak for a longer period than these other advanced economies.”

These figures are striking indeed, and there is no doubting the strain on UK household finances from eye-watering electricity and gas prices. The Conservatives’ failure to get a grip on domestic energy prices is utterly lamentable.

Ms Dhingra also noted UK “GDP per capita has been falling all of last year” and that “retail sales volumes have been trending down since the second half of 2021”.

She also observed: “There are substantial policy impacts on consumption to come through, according to direct evidence from the Financial Policy Committee’s mortgage data analysis that showed 45% of fixed-rate mortgages are yet to come up for renewal and more macro modelling by [Bank of England] staff of various consumption effects.”

Contemplating the inflation picture, and putting this in the context of his decisions on interest rates, Mr Bailey talked about beginning to see things “going in the right direction”, but added: “We need to see more evidence of that… and that's what will shape my vote going forwards.”

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Mr Broadbent offered his view that cuts in interest rates were possible this year.

He said: "In my view that is the more likely direction in which Bank Rate is likely to move. But even if that proves to be the case, the timing of any adjustment can only depend on the actual evolution of the economic data.”

The pair do not sound like people in a hurry to bring down benchmark borrowing costs, following news of the UK’s tumble into recession. UK base rates have been raised to their current level from a record low of 0.1% in December 2021.

Data this month from the Office for National Statistics showed the UK economy tumbled into recession in the final three months of last year with a 0.3% quarter-on-quarter fall in gross domestic product. This followed a 0.1% decline in the three months to September.

Ms Dhingra, for her part, rightly pointed out that monetary policy “needs to be forward-looking because moderation of the policy stance requires time to implement and to feed through to the real economy”.

She also highlighted her view that “consumer price inflation is on a firm downward path, and has been for some time now”.

And, crucially, she warned there are “downside risks to living standards from keeping policy tight”.

She declared: “The evidence to err on the side of overtightening is not compelling in my view as it often comes with hard landings and scarring of supply capacity that would weigh further on living standards.”

Ms Dhingra added: “Historical evidence from periods of high inflation suggests that successfully resolving high inflation required a median length of three years...Going by this, the current episode is already at this point…Importantly, this evidence includes hard landings, such as the experience of the United Kingdom in the 1980s, when inflation was ‘successfully resolved in less than five years’.”

Right now, looking at the state of the UK economy, what we are hearing from Ms Dhingra seems more convincing than the narrative from senior Bank of England staffers on the MPC.

The last thing we need, after all we have endured in recent years, is for living standards to be damaged further by overdoing the interest-rate medicine.

And it is heartening to hear an MPC member focus on living standards. Others have in the past, of course, including Danny Blanchflower, the eminent US-based economist and University of Glasgow visiting professor.

In contrast, there seems to have been far too little cognisance in recent times of the impact on living standards of big policy decisions, from the ruling Conservatives obviously but also to a lesser though nevertheless significant extent at times from the Old Lady of Threadneedle Street.

UK interest rates have been very much in focus in the last week.

The Bank of England’s Governor, Andrew Bailey, and the Old Lady of Threadneedle Street’s deputy governor for monetary policy, Ben Broadbent, signalled they were in no particular hurry to vote for a cut in base rates from 5.25% when they appeared before the Treasury Committee on Tuesday.

They even gave the impression of being keen to play down the fact the UK had fallen into recession.

Mr Bailey told MPs that the recession, by historical standards, “is the weakest by a long way”.

Mr Broadbent said the definition of a recession used in the UK (two consecutive quarters of falling output) was “unhelpful”, pointing out other countries such as the US calculate it differently.

External Bank of England Monetary Policy Committee member Swati Dhingra, who voted alone for a cut in UK base rates at the MPC’s meeting which ended on January 31, struck a very different tone in a speech on Wednesday.

Ms Dhingra highlighted various points of weakness in the UK economy.

She said: “Despite an easing in consumer price inflation and recent real wage recovery, consumption remains weak. Consumption has not recovered to its level before the pandemic. This is in sharp contrast to the robust growth seen in the US and the recovery in the euro area since 2022.

“Consumption has grown by 12.3% in the US from December 2019 to September 2023 and recovered by 2.17% in the euro area. Consumption in the UK for December 2023 was still 2.25% lower than that in 2019. This is unsurprising because there was a sharper rise in utility bills in the UK and they stayed at their peak for a longer period than these other advanced economies.”

These figures are striking indeed, and there is no doubting the strain on UK household finances from eye-watering electricity and gas prices. The Conservatives’ failure to get a grip on domestic energy prices is utterly lamentable.

Ms Dhingra also noted UK “GDP per capita has been falling all of last year” and that “retail sales volumes have been trending down since the second half of 2021”.

She also observed: “There are substantial policy impacts on consumption to come through, according to direct evidence from the Financial Policy Committee’s mortgage data analysis that showed 45% of fixed-rate mortgages are yet to come up for renewal and more macro modelling by [Bank of England] staff of various consumption effects.”

Contemplating the inflation picture, and putting this in the context of his decisions on interest rates, Mr Bailey talked about beginning to see things “going in the right direction”, but added: “We need to see more evidence of that… and that's what will shape my vote going forwards.”

Mr Broadbent offered his view that cuts in interest rates were possible this year.

He said: "In my view that is the more likely direction in which Bank Rate is likely to move. But even if that proves to be the case, the timing of any adjustment can only depend on the actual evolution of the economic data.”

The pair do not sound like people in a hurry to bring down benchmark borrowing costs, following news of the UK’s tumble into recession. UK base rates have been raised to their current level from a record low of 0.1% in December 2021.

Data this month from the Office for National Statistics showed the UK economy tumbled into recession in the final three months of last year with a 0.3% quarter-on-quarter fall in gross domestic product. This followed a 0.1% decline in the three months to September.

Ms Dhingra, for her part, rightly pointed out that monetary policy “needs to be forward-looking because moderation of the policy stance requires time to implement and to feed through to the real economy”.

She also highlighted her view that “consumer price inflation is on a firm downward path, and has been for some time now”.

And, crucially, she warned there are “downside risks to living standards from keeping policy tight”.

She declared: “The evidence to err on the side of overtightening is not compelling in my view as it often comes with hard landings and scarring of supply capacity that would weigh further on living standards.”

Ms Dhingra added: “Historical evidence from periods of high inflation suggests that successfully resolving high inflation required a median length of three years...Going by this, the current episode is already at this point…Importantly, this evidence includes hard landings, such as the experience of the United Kingdom in the 1980s, when inflation was ‘successfully resolved in less than five years’.”

Right now, looking at the state of the UK economy, what we are hearing from Ms Dhingra seems more convincing than the narrative from senior Bank of England staffers on the MPC.

The last thing we need, after all we have endured in recent years, is for living standards to be damaged further by overdoing the interest-rate medicine.

And it is heartening to hear an MPC member focus on living standards. Others have in the past, of course, including Danny Blanchflower, the eminent US-based economist and University of Glasgow visiting professor.

In contrast, there seems to have been far too little cognisance in recent times of the impact on living standards of big policy decisions, from the ruling Conservatives obviously but also to a lesser though nevertheless significant extent at times from the Old Lady of Threadneedle Street.