Bank of England will sign off steeper rate hike if inflation persists, chief economist warns

Bank Of England Monetary Policy Report Press Conference
Despite highlighting the uncertainty, the Bank said current evidence suggests that the existing timescale over which risks banks and insurers hold capital are appropriate for climate risks.

The Bank of England will ramp up the pace of its tightening cycle if inflation continues to motor ahead, its chief wonk said today.

Speaking at the London and Qatar centre for global banking and finance conference at Kings College, Huw Pill, chief economist at the Bank, said its latest forward guidance reflects “my willingness to adopt a faster pace of tightening than implemented thus far in this tightening cycle”.

In its latest policy statement, members of the monetary policy committee (MPC) said they will “act forcefully in response” to “more persistent inflationary pressures”.

So far, Threadneedle Street has stuck to nudging interest rates in smaller increments, hiking them at each of its last five meetings, taking them to a 13-year high of 1.25 per cent.

Analysts have been pricing in a greater chance of the Bank signing off a steeper 50 basis point rise in their coming meetings.

Wall Street giant Goldman Sachs thinks the MPC will vote in favour of two successive 50 basis point rises and another two 25 basis point moves this year, taking borrowing costs to 2.5 per cent by the end of the year.

That ratcheting up in expectations has been driven by the Bank having to move faster to tame what is forecast to be a more than 11 per cent inflation October. That peak would be more than five times the Bank’s two per cent target. 

Pill backed a smaller rate rise at the last Bank meeting. Six other members of the MPC, including governor Andrew Bailey, also backed a 25 basis point move. Three wanted a steeper increase.

A rapid acceleration in the US Federal Reserve’s tightening cycle has also raised expectations for a quicker move by the Bank. 

Fed chair Jerome Powell hiked rates 75 basis points at their last meeting, something they have not done since 1994. They are expected to do so again later this month.

Pill warned a softening in the UK economy caused by price rises will eventually feed through to hardship for households.

The Bank is bracing for “a squeeze on UK household real incomes, which constrains domestic spending and demand, and threatens to open up a margin of economic slack and eventually higher unemployment in the UK,” he said.

Goldman also thinks Britain is more likely than the US and eurozone to tip into recession.