BoE’s Lombardelli worries over above-forecast inflation, backs gradual rate cuts

LONDON (Reuters) -Bank of England Deputy Governor Clare Lombardelli said on Monday she was more worried about the risk that inflation comes in higher – not lower – than the central bank has forecast as she made the case for only gradual reductions in interest rates.

“I view the probabilities of downside and upside risks to inflation as broadly balanced,” Lombardelli, making her first speech since joining the BoE in July, said to a conference organised by King’s Business School.

“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.”

Lombardelli said a scenario where wage growth eases to around 3.5%-4% and inflation stabilises at around 3% rather than the BoE’s 2% target would be more costly to address, if that became the “new normal” expectation for firms and consumers.

Some economists think Britain’s inflation rate could rise to 3% in early 2025.

Last week, another BoE deputy governor, Dave Ramsden, said British inflation could undershoot the Bank of England’s latest forecasts, potentially requiring faster interest rate cuts.

Lombardelli said preliminary purchasing manager index reports published last week suggested a slowing of Britain’s economy but she added that she did not take a strong signal from a single release of data.

“Given the lags in policy it would be important not to act late if the economy moved in this direction,” she said.

The BoE has lowered rates twice since August, lowering it to 4.75% from a 16-year high of 5.25%, less than cuts by the European Central Bank and the U.S. Federal Reserve due mostly to concerns about inflation pressure in the UK jobs market.

(Reporting William Schomberg and Andy Bruce)