A Look at the British Economy: Lombardelli's Cautionary Words on the Danger of Inflation

The Deputy Governor of the Bank of England, Clare Lombardelli, recently expressed at a conference that she is more concerned about a higher rather than a lower inflation rate, as she called for a cautious reduction in interest rates. This assessment highlights the Bank's vigilant stance on inflation risks. Lombardelli emphasized that although both opportunities and dangers for inflation are roughly evenly distributed, the effects of higher inflation could require far more costly monetary policies. The notion that wages might rise by 3.5%-4% and inflation could stabilize at around 3% presents a significant challenge if this becomes a firm expectation for businesses and consumers. Some economic experts predict that UK inflation could indeed climb to 3% by early 2025. These assessments are in the context of statements made by another Deputy Governor of the Bank, Dave Ramsden, who last week anticipated a possible undershooting of the current inflation forecasts, which might necessitate faster interest rate cuts. Lombardelli referred to recent Purchasing Managers' Index data indicating a weakening of the UK economy. Nevertheless, she cautioned against drawing hasty conclusions from a single data survey, but emphasized the need to act promptly should the economy move towards slower growth. The Bank's latest measures include two interest rate cuts since August, reducing the rate from a 16-year high of 5.25% to 4.75%, which, however, are smaller adjustments compared to the European Central Bank and the US Federal Reserve.