The threat of a trade war sparked by the US and rising geopolitical tension mean that the Bank of England’s gradual approach to rate cuts is “no longer valid,” Monetary Policy Committee member Catherine Mann said.
Mann’s comments come as US President Donald Trump decides whether to push ahead with 25% tariffs on goods imported from Canada and Mexico, and an additional 10% tariff on Chinese imports.
President Trump has previously hinted that he may also impose tariffs on countries that charge VAT, leaving Britain at risk of a £24bn blow to its economy over two years.
The UK has a relatively high VAT rate of 20%, while US sales taxes are relatively low.
“With substantial volatility coming from financial markets, especially from cross-border spillovers, the founding premise for a gradualist approach to monetary policy is no longer valid,” the external Monetary Policy Committee member said in a speech at the Reserve Bank of New Zealand last night.
Previously hawkish Mann and dove Swati Dhingra were outvoted when rate-setters voted 7-to-2 last month to cut the base rate by 0.25% to 4.5%. They both voted for a 0.5% reduction. Inflation is currently 3%, above the Bank’s 2% target.
At the time, Bank of England governor Andrew Bailey said the central bank would adopt a “gradual and careful” approach to further rate cuts, which many in the City take to mean at least two more quarter-point reductions this year.
But Mann said, that factors such as the prospect of increased global tariffs and tensions over the Ukraine-Russia war, which may lead to increased European defence spending, meant that a gradual approach to base rate cuts was no longer useful.
She said: “Gradualism as the preferred monetary policy strategy was promulgated at a time when financial flows were small and the markets more stable.”
But Mann now pointed out that since the beginning of the year, “international spillovers have dominated the signals from UK domestic data and monetary policy actions”.
She added that a more “activist monetary policy strategy” was needed to transmit to markets that rate-setters had a credible response to the new environment.
Mann said: “Larger cuts, such as the one I voted for in the latest meeting, cuts through this turbulence, with the objective to more effectively communicate the stance of policy and influence the economy.”
Yesterday, the European Central Bank cut interest rates to 2.5% from 2.75%, the sixth time in nine months as it seeks to bolster eurozone economic growth. Eurozone inflation is 2.4%, above its 2% target.
