New BoE rate-setter Mann warns against early end to stimulus

© Reuters. FILE PHOTO: The Bank of England and the City of London financial district in London, Britain, November 5, 2020. REUTERS/John Sibley

By David Milliken and William Schomberg

LONDON (Reuters) -The Bank of England should not cut back on stimulus too early, a top economist who will soon join the BoE's rate-setting committee said on Monday, underscoring a divide among UK policymakers about how to respond to rising inflation.

Catherine Mann, a former chief economist at the Organisation for Economic Co-operation and Development and at U.S. bank Citi, said a recent rise in inflation did not look like it would turn into a spiral of persistently stronger price growth.

"I don't see it becoming a spiral. I am on the lookout for it, but I don't see it becoming a spiral," Mann told lawmakers.

The BoE expects consumer price inflation to surpass 3% soon, well above its 2% target, though most policymakers see the rise being driven by one-off or temporary effects such as a jump in oil prices and post-pandemic bottlenecks in supply chains.

Mann's comments echoed those made earlier on Monday by MPC member Jonathan Haskel, who said reducing stimulus was not the right option for the foreseeable future.

By contrast, two other BoE rate-setters, Deputy Governor Dave Ramsden and MPC external member Michael Saunders, last week said the time for tighter policy might be approaching.

Mann said lessons from the global financial crisis of 2008-09 showed that worries about rising inflation on the back of a jump in oil prices and about debt levels had led to a loss of economic output which hit younger and poorer workers.

"We don't want to repeat that coming out of COVID. And so I think that bears on the need to not be premature in terms of tightening monetary policy," she said.

"The sort of metaphor has been used, and I guess it's appropriate under the current circumstances, is to say: 'You've got to wait until you see the whites of their eyes'," she said, referring to signs of persistent inflation pressures.

Mann will join the BoE's Monetary Policy Committee on Sept. 1, replacing Gertjan Vlieghe.

DOUBTS ABOUT QE

Mann said the global economic recovery was more fragile than headline growth rates of around 6% suggested, and was vulnerable to new variants of COVID.

Global share prices slid on Monday as investors feared the spread of the Delta variant could derail U.S. growth.

The U.S. economy has rebounded faster than Britain's and Mann said the Federal Reserve was likely to raise interest rates before the BoE.

Finance markets currently price in a first rate rise by the BoE - to 0.25% from 0.1% - by June next year.

Mann said the BoE would need to take account of the likely knock-on impact in Britain from higher U.S. rates which would reduce the urgency for a hike by the BoE.

Although she did not favour ending BoE stimulus early, Mann questioned the effectiveness of bond purchases in boosting the real economy, something that grew during by her time at Citi.

The impact of any reversal of quantitative easing was also hard to predict, she added.

Mann raised doubts about the usefulness of negative interest rates, given their knock-on impact on bank profitability and household saving.