Clare Lombardelli, a rate-setter at the Bank of England, has expressed caution regarding the inflationary dynamics in the economy. In her inaugural speech as one of the Bank’s deputy governors, she advocated for 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 stated at the Bank of England’s watchers conference, as reported by .
She suggested that the outlook for wages and services prices, both key indicators of underlying inflationary pressure, was "unclear".
Recent official figures revealed that inflation rose back up to 2.3 per cent in October, with services inflation increasing to 5.0 per cent. Regular wage growth currently 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 some indications that the "process of wage disinflation may be slowing". It’s too early to declare victory on inflation.
It’s often been said that the last mile may be the hardest, and that’s where we are now.
In addition to her role as a rate-setter, Lombardelli has also taken on the task of responding to the Bernanke review, published last year. The review highlighted "material under-investment" in core infrastructure, indicating that much of the key software was outdated.
The former Fed chair also advised the Bank to utilise different scenarios more when outlining the probable trajectory for interest rates. Lombardelli admitted that the review made for "uncomfortable reading", implying that "the whole nose to tail process of monetary policy making and communication" will eventually need reforming.
"This will be the largest reform since the Bank was granted operational independence for monetary policy in 1997," she stated. The Bank has already started using scenarios more in its communication, presenting various possibilities for economic development.
"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 explained. Lombardelli also confirmed that the Bank would invest in improving its modelling toolkit.
She noted that the Bank had "already made some progress" in updating its core models. Regarding the communication of policy decisions, Lombardelli suggested that the Bank would proceed cautiously.
She stated: "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,".
