Sarah Breeden, deputy governor for financial stability at the Bank of England, says the current monetary policy stance is 'restrictive' and is continuing to squeeze inflation persistence from the system.
Inflation remained 3.8% in the latest data for August and the Bank now expects it to peak at 4% this year.
However, Breeden says she has seen no evidence that the disinflation process is veering off-track and that "the 'hump' will prove just a bump in the road", driven by external shocks that are not a reflection of domestic inflationary pressures.
Breeden says that with a looser labour market and weaker demand than in the 2022 inflation episode, she thinks it's "unlikely that we will see additional second-round effects".
She added that monetary policy "continues to contribute to the ongoing disinflationary process", stating that "while the degree of restrictiveness has fallen over the past eighteen months, I still judge the monetary policy stance to be restrictive and to be squeezing persistence from the system".
Breeden concluded: "It may be tempting to wait to see the 'whites of disinflation’s eyes' before looking to reduce the restrictiveness of policy further. But managing the upside risks to inflation in this way brings risk in the other direction: holding policy too tight for too long comes with costs to output and employment, which could then pull inflation below target.
"However, the path ahead is not assured. Indeed we face risks on both sides – that greater persistence means inflation turns out to be sticky not bumpy, and that unexpectedly weak demand causes an unanticipated easing in price pressures. Steering a path that manages both risks is not easy."
