Bank needs to ‘see the job through’ on inflation, says Pill – but divisions remain
The chief economist at the Bank of England, Huw Pill, has suggested that more work is needed to tame price rises because there is a danger of high inflation becoming embedded in the UK economy.
“The onus remains on ensuring enough monetary tightening is delivered to ‘see the job through’ and sustainably return inflation to target,” Pill said in a speech in Geneva today.
He noted that while inflation is set to fall “significantly in the course of this year… caution is still needed in assessing inflation prospects on account of the potential persistence of domestically generated inflation.”
Pill is among the more hawkish members of the Bank’s Monetary Policy Committee (MPC) – the body that sets interest rates.
Inflation jumped to 10.4 per cent in February, surprising markets who had expected inflation to slip into single digits.
Core inflation, which strips out volatile components like energy and food, also jumped up to 6.2 per cent. This suggests the initial price burst fuelled by Russia’s invasion of Ukraine has embedded itself in the domestic economy, making it harder for policymakers to tame.
In response the Bank hiked interest rates for an eleventh time in a row, taking the base rate to a post-financial crisis high of 4.25 per cent.
But Pill admitted that the Bank’s decision must take into account other “economic disturbances”, highlighting recent difficulties in the banking sector and the potential influence of further rate rises on the provision of credit.
He said the MPC needs 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.”
Pill’s remarks came the same day as Silvana Tenreyro, a external member of the MPC, said the Bank will have to cut rates sooner to make sure inflation does not fall below its target of two per cent.
She argued inflation was primarily driven by supply-side shocks, which are now easing.
“As the effects of the large and rapid tightening in policy gradually come through over the course of 2023 and 2024, this is likely to drag demand well below its potential, loosening the labour market and pulling down on inflation,” she said.
“The high current level of Bank Rate will require an earlier and faster reversal, to avoid a significant inflation undershoot,” she said.
The comments came shortly after OPEC announced a cut to its oil production, a cut which caused the price of oil to surge to around $85, its highest level in months. Analysts are worried that the jump in oil prices will pressure on inflation upwards in the coming weeks.
The Bank’s next rate decision is in May, with markets currently forecasting a 25bps hike.