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The Bank of England’s chief economist hinted at a further interest rate rise in May when he said the central bank needed to “see the job through” in its battle to eradicate high inflation.
Huw Pill, however, stressed that the Monetary Policy Committee faced a tight decision on whether to raise interest rates again from 4.25 per cent, especially at a time of financial market fragility.
“On balance, the onus remains on ensuring enough monetary tightening is delivered to see the job through and sustainably return inflation to [the 2 per cent] target,” he said in a speech to the Graduate Institute in Geneva.
“Nonetheless, those of us on the MPC need to remain vigilant to signs of tightening financial conditions and be prepared to respond to the macro implications of any dislocation to credit markets to the extent that they influence the outlook for inflation.”
Since joining the central bank in September 2021, Pill has always voted with the majority on the committee that sets borrowing costs. His nuanced remarks on interest rates are also shared by financial markets, which expect interest rates to peak at 4.5 per cent, but are split close to 50:50 on whether the rate rise will come at the next meeting in early May.
Pill stressed that he was examining most closely the danger that high inflation becomes persistent in the UK with companies raising prices and workers demanding higher pay increases to prevent a loss of income.
There were no signs in UK data of either excess profiteering driving inflation or excess wage rises, he said.
His accompanying slides showed he considered the biggest risks were a buoyant labour market combined with greater corporate pricing power generating a simultaneous inflationary “push” from higher wages along with a “shove” from companies raising prices to defend profit margins.
To combat this process, higher interest rates were both a “powerful” tool to curb spending, but also a “blunt” one, he added.
He said it was hard to know what the right level was for interest rates to start cooling the economy — inflation rose month on month in February to 10.4 per cent after falling at the start of the year — because there were questions over how much the BoE could “trust” its economic models. He suggested their accuracy was impaired by inflation running at its highest levels in 30 years.
Pill pushed back against suggestions that the improved outlook for the UK economy since the start of the year increased inflationary pressures. Lower wholesale natural gas prices would both improve the outlook for economic performance and lower inflation risks, he said.
In a separate speech, Silvana Tenreyro, an independent MPC member, disagreed with Pill’s view that rapid price increases were now a persistent feature of the UK economy.
She predicted that inflation would drop rapidly with little persistence and said monetary policy had been too tight. “I expect that the high current level of bank rate will require an earlier and faster reversal, to avoid a significant inflation undershoot.”
Having voted against every interest rate rise since September, Tenreyro is not a swing voter on the committee and is leaving the MPC after the meeting in June.
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