By David Milliken
LONDON (Reuters) – The Bank of England should take a cautious approach to raising interest rates as the economy remains below its pre-crisis size and the health of the labour market is hard to interpret, BoE policymaker Silvana Tenreyro said on Friday.
Tenreyro – who voted to keep the BoE’s Bank Rate at 0.1% on Thursday – said central banks did face a trade-off between supporting economic recovery and acting against inflation pressures which could turn out to be persistent.
But central bankers should not jump the gun in reacting to rising inflation, especially in Britain where economic output was still well below where it would have been without the COVID-19 pandemic, she added.
“Central banks, not just the Bank of England, will need to balance their inflation and real-economy objectives. This balancing requires in my view a cautious approach, grounded in data and a comprehensive assessment of the various risks,” she said at a conference hosted by the International Monetary Fund.
Tenreyro has previously taken a guarded approach to the possibility of raising interest rates.
She said labour market data was the greatest source of uncertainty about the economic outlook in Britain and elsewhere, as unemployment had stayed low but there was uncertainty about how many formerly furloughed workers would find jobs and whether there was a permanent fall in labour force participation.
The BoE said on Thursday that most policymakers still saw value in waiting for official data on the impact of the end of government furlough support on Oct. 1 before deciding whether to raise rates, although an increase was likely to be needed.
“Our monetary policy should not try to offset short-lived factors, as that would create additional volatility,” Tenreyro said.
“However some of these factors might prove more persistent, which means central banks are effectively in trade-off territory, having to strike a balance between how quickly to bring inflation back to target and how much to continue to support the economy through the ongoing recovery,” she added.
(Reporting by David Milliken; Editing by Alistair Smout/Guy Faulconbridge)
