Persistent inflation: People at the Borough Market in London. Inflation is thought to have peaked but it is expected to remain elevated throughout 2023. — Bloomberg
LONDON: The Bank of England (BoE) needs to raise interest rates further to tackle inflationary pressures that are becoming increasingly domestic, says chief economist Huw Pill.
“My judgement there is still some more to do in order to address prevailing inflationary pressures and complete the necessary normalisation of monetary policy following a decade or more of exceptional accommodation,” he said at the Beesley Lecture here.
The BoE has raised rates from 0.1% to 3% in the past year, with Pill among the majority who voted for a historic increase of three quarters of a per cent this month.
Inflation is at a four-decade high of 11.1%, more than five times the BoE’s 2% target. It is thought to have peaked but is expected to remain elevated throughout 2023. Markets expect a half-point rate rise in December, and the Organisation for Economic Cooperation and Development forecasts rates to reach 4.5% by June.
Pill said the main two factors behind rising inflation are energy prices and job shortages, with the UK facing acute pressures caused by half a million people dropping out of the workforce since the start of the pandemic.
He said his decisions would be influenced by developments in “the labour market and corporate pricing behaviour.” Recent BoE surveys show companies planning to increase both wages and prices.
Pill repeated the BoE’s argument that rates are not likely to rise above 5%, as priced by markets at the start of the month. “But, given the need to contain the risk of greater inflation persistence implied by potential second-round effects, further action is likely to be required,” he said.
BoE forecasts showed inflation falling below the 2% target in 2024, even under a scenario where interest rates remain at current levels. That’s prompted more dovish members of the Monetary Policy Committee to warn of the risk of overtightening. However, in comments following his speech, Pill said the BoE was maintaining a “laser-like focus” on its mission.
“High inflation begets high price setting, higher wage demands – it is the focus on the things that are key. It is those things that can persist into the 18-month or two-year horizon,” he said. “When you get big shocks all at once, in the same direction, you get a big, and hopefully temporary – we will ensure it is temporary –departure from target.” — Bloomberg
