A Bank of England policymaker has warned of 'downside risks' to the UK economy

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The Bank of England rate setter has warned that the central bank may be „underestimating the downside risks” to the UK economy as the central bank calls for immediate interest rate cuts amid weak consumer spending and falling inflation.

Swati Dhingra, an external member of the bank's monetary policy committee, was the only person to vote to cut interest rates at a recent meeting last week. He advocated a quarter-point cut from 5.25 percent.

In an interview after the MPC held rates on Thursday, the associate professor of economics at the London School of Economics told the Financial Times that he saw no risk of rebounding price growth given the weak state of housing demand.

„I'm not entirely convinced that there is some kind of sharp excess demand coming from the consumption side of the economy,” he said. „I'm very concerned that we may be underestimating the downside risks.”

He added that „buffers” to prop up UK households' finances were limited as pandemic-era savings dwindled and job vacancies dwindled.

„You can see that the real economy is starting to be negatively impacted in a very deep way — I don't see why we should risk that,” Dhingra said.

With consumption weak, „it's hard to imagine how that could reverse so sharply that you'd see a resurgence of inflation.” [driven by] Demand pressure,” he added.

Despite keeping rates on hold last week for a fourth meeting, the central bank has now opened the door to cuts, but only if there is „more evidence” that inflation will continue to fall.

Consumer price inflation was 4 percent in December, less than half the rate in early 2023.

The bank's chief economist Huw Bill said on Monday that it was now a question of when the BoE would cut rates, but he said the timing was not yet appropriate.

Dhingra said sitting tight also comes with the risk of „too much tightening” of monetary policy when inflation eases.

He decided to vote for a cut for the first time because of the worst retail sales figures seen in December, underscoring weakness in housing demand.

The volume of goods bought in Great Britain fell by 3.2 per cent between November and December, the biggest monthly fall since January 2021, according to the Office for National Statistics.

„Retail sales are very solid … I don't think they're going to fall that much,” she said.

Although the central bank is concerned by the stickiness of services price inflation, Dhingra argued that goods price deflation would be enough to keep UK inflation within the central bank's 2 percent target this year.

The bank last week forecast that inflation would ease towards 2 percent in the second quarter before rebounding in late 2024.

Dhingra said inflation has moved firmly downwards for six months, with widespread declines in the components that make up the consumer price index.

„It's a pretty steady decline that's happening,” he said. „I was pretty sure it wasn't just energy driving everything; it was much more broad-based than we'd seen.”

At the same time the economy is not witnessing a wage-price spiral that would threaten the central bank's ability to return inflation to target, he added.

Considering the backlash in the monetary policy process, Dhingra said, “Even if you reduce now . . . We're basically still looking at a pretty tight period of monetary policy”.