Inflation becoming more ‘home grown’, warns Bank of England deputy governor

Inflation is “becoming much more home grown” and will force interest rates to stay high for longer, a deputy governor of the Bank of England has warned.

Sir Dave Ramsden said “much stickier” price rises in Britain’s services sector, which covers everything from banking to waiting tables, were making it difficult to reach the Bank’s 2pc inflation target.

Wage rises in the “labour intensive” sector, which accounts for 45pc of how the consumer price index (CPI) inflation is calculated, are keeping inflation stubbornly high, Sir Dave said.

Service sector inflation is currently running at 6.6pc, which is higher than forecasters had expected.

Sir Dave told Bloomberg TV:  “We think that inflation is going to be really challenging to squeeze out of the system.

“It’s driven by wages, where wage growth remains above 7pc.

“The service sector in the UK is very labour-intensive. So these factors are what’s leading us to think that inflation is going to stay stubbornly high through next year.”

Services inflation is rising much faster than the headline rate, which dropped to 4.6pc in October. The sharp fall from September’s 6.7pc has raised hopes that the Bank may begin lowering interest rates in the new year.

Financial markets and economists believe the Monetary Policy Committee (MPC) may start cutting rates as early as spring 2024.

However, Sir Dave said borrowing costs will have to stay higher “for an extended period” if inflation is to be brought back to 2pc by 2025.

He said the recent rapid fall in inflation had been driven “by a bigger fall in the energy component than we were expecting” as prices ease after the shock caused by Vladimir Putin’s invasion of Ukraine.

Rather than being driven by external shocks such as energy prices, inflation is now being fuelled by factors such as service sector wage growth. Sir Dave said: “That’s really a sign that UK inflation is becoming much more home-grown.”

He is the latest ratesetter to push back against market expectations of rate cuts in the new year. A succession of policymakers including Governor Andrew Bailey have told traders, businesses and households not to expect rates to come down any time soon because inflation is still far too high.

Mr Bailey said this week: “I have pushed back of late against assumptions that we’re talking about cutting interest rates or we will be cutting interest in anything like the foreseeable future because it’s too soon to have that discussion.”

Sir Dave and his colleagues on the nine-strong MPC have kept interest rates steady at 5.25pc since August.

Interest rate changes take between 18 months and two years to have their full effect on the economy and on inflation.

The Bank only began raising rates in December 2021, so even their first rise, from 0.1pc to 0.25pc, may not yet have had its full impact on price rises. Pressure from the sharp series of subsequent increases is also still mounting.

Inflation has fallen from a peak of 11.1pc in October 2022, allowing Rishi Sunak to claim victory on his new year pledge to halve inflation in 2023.