Bank of England’s Lombardelli supports ‘gradual’ interest rate cuts

Clare Lombardelli, a rate-setter at the Bank of England, struck a cautious note as she laid out her views on the inflationary dynamics in the economy.

In her first speech as one of the Bank’s deputy governors, Lombardelli said she supported a “gradual removal” of monetary policy restriction.

“I view the probabilities of downside and upside risks to inflation as broadly balanced. But at this point I am more worried about the possible consequences if the upside materialised, as this could require a more costly monetary policy response,” she said at the Bank of England’s watchers conference.

She argued that the outlook for wages and services prices, both of which are seen as crucial gauges of underlying inflationary pressure, was “unclear”.

Last week official figures showed that inflation rose back up to 2.3 per cent in October, with services inflation rising to 5.0 per cent.

Regular wage growth, meanwhile, stands at 4.8 per cent, still comfortably ahead of target-consistent levels.

“We need to see more evidence that wage growth and services inflation will continue their journey down to target-consistent rates,” she said, noting that there were some signs that the “process of wage disinflation may be slowing”.

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Alongside her role as a rate-setter, Lombardelli has also taken responsibility for the Bank’s response to the Bernanke review, which was published last year.

The review found that there had been “material under-investment” in core infrastructure, meaning a lot of key software was out of date. The former Fed chair also recommended that the Bank make greater use of different scenarios when communicating the likely path for interest rates.

Lombardelli said the review made for “uncomfortable reading”, suggesting “the whole nose to tail process of monetary policy making and communication” will eventually have to be reformed. 

“This will be the largest reform since the Bank was granted operational independence for monetary policy in 1997,” she said.

The Bank has already made greater use of scenarios in its communication, laying out different alternatives for how the economy might develop.

“A wider and more systematic use of scenarios will allow us to better consider alternative conditioning assumptions and also different relationships between economic variables,” she said.

Lombardelli also confirmed that the Bank would invest in its modelling toolkit. She said the Bank had “already made some progress” on updating its core models.

Regarding the communication of policy decisions, Lombardelli suggested that the Bank would move slowly.

“Dr Bernanke recommends that we ‘move cautiously’ in adopting changes to communications. He is right, not least because of the importance of clear communication for monetary policy… Substantive changes to our external communications will take time,” she said.