Bank of England's Tenreyro sees rates on hold, then falling in 2024

FILE PHOTO: The Bank of England building in the City of London, Britain

LONDON (Reuters) -Bank of England monetary policymaker Silvana Tenreyro said on Friday that the central bank should not raise its key interest rate above its current 3% and may need to cut it in 2024, based on the BoE's latest forecasts for the economy.

"I would expect that Bank Rate held at 3% over 2023 would reduce output further below potential, given the effects of lower real incomes and the lagged impact of the tightening to date," Tenreyro said in a speech to the Society of Professional Economists in London.

"Policy would then have to loosen, perhaps in 2024, to try to prevent inflation falling below target."

Tenreyro said that her vote last week for a small 25 basis-point increase in Bank Rate was justified on a risk management basis, given the risk of inflation going higher, although she felt that its previous level of 2.25% was already restrictive.

A majority of Tenreyro's colleagues backed a 75 basis-point hike which took Bank Rate to 3%.

"Monetary policy has tightened significantly this year, but most of its effects on demand have yet to occur," she said on Friday. "Too high a path for Bank Rate therefore risks over-steering inflation below target in the medium term."

The BoE similarly warned investors last week that they were expecting too many future rate hikes. But it signalled that some further increase in borrowing costs was likely to be needed to snuff out the risks of an inflation rate currently above 10%.

Tenreyro said demand in Britain was likely to weaken even if energy prices fall back. She also said there were initial signs that the labour market was starting to lose momentum and the economy was probably about to enter a recession.

(Writing by William Schomberg; editing by David Milliken)