Raising UK interest rates further could damage an already weakened economy, a Bank of England rate setter has warned.

Any increase “risks unnecessarily denting output at a time when the economy is weak and deepening the pain for households when budgets are already squeezed,” Swati Dhingra, a member of the Bank’s Monetary Policy Committee (MPC), said.

The Bank should hold rates steady when the committee meets again later this month, she told a Resolution Foundation think-tank conference amid “growing signs external price pressures are easing”.

The economist believes that worries over domestic inflation pressures – so-called “baked-in inflation” – are overblown. Most inflation is the result of higher energy and import prices, she said.

“Overall, the magnitude of domestically generated inflation is, if anything, likely to be smaller than we estimate. Consumption remains weak and many of the tightening effects of monetary policy are yet to fully take hold,” she said in a rare speech since becoming an MPC member.

Dr Dhingra, regarded as a dovish member of the MPC, joined the Bank’s interest rate-setting committee in August last year.

Her view of inflation contrasts with fellow MPC member Dr Catherine Mann, who has repeatedly warned of the dangers of complacency about inflation. “If there is uncertainty about the degree of inflation persistence, it is better to assume a high degree, because the costs of making a mistake if the true inflation process is more persistent are larger than if the true inflation process is less persistent,” Dr Mann said.

Forecasters believe UK inflation will drop to around 5 per cent by the end of the year from its current 10.1 per cent. City traders expect the Bank to raise rates by 0.25 percentage points to 4.25 per cent on 23 March.

Her comments came as Andy Haldane, a former member of the MPC, said the Bank needed to move carefully in any future rate rise.

File photo dated 4/9/2019 of Bank of England chief economist and interest rate setter Andy Haldane who is leaving to head up the Royal Society for Arts, Manufactures and Commerce (RSA). Issue date: Tuesday April 13, 2021. PA Photo. Mr Haldane, who has been with the Bank for more than 30 years, will step down from the Monetary Policy Committee (MPC) after its June meeting. See PA story ECONOMY Haldane. Photo credit should read: House of Commons/PA Wire
“The bank could choose in an open and transparent way, subject to Treasury agreement, to take longer than the conventional one to two years to get it”: AndyHaldane, former Bank of England chief economist (Photo: House of Commons/PA)

“Given the amount of tightening already in the system from last year, and given the flickerings of growth from a low base, I’d be going cautiously just at the moment before embarking on a further round of sharp tightening certainly,” Haldane told Bloomberg.

In 2021, alarmed by signs of UK inflation beginning to rise in the aftermath of the pandemic, Mr Haldane argued the Bank of England should have lifted interest rates more quickly.

He also warned that the Bank now faced the “hardest yards” in reducing inflation to its 2 per cent target. Arguing the Bank should retain its target, he suggested it takes longer to reach that goal – three to four years instead of the current one to two.

“The bank could choose in an open and transparent way, subject to Treasury agreement, to take longer than the conventional one to two years to get it,” Haldane said.

“They could specify that up front and say we’re going to take three years, three and a half years or four years to do this, a bit longer than usual so we can play some cushioning role. Or they could leave it slightly more open-ended than that.”

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