BoE’s Huw Pill insists that ‘further work needs to be done’ after fresh base rate increases
The Bank of England will exacerbate its squeeze on the economy over the months ahead as it sets out to end the highest inflation rate in four decades, its chief economist warned.
Noting that Threadneedle Street was encountering the toughest problem since gaining independence in 1997, Huw Pill said “further work needs to be done” to return the annual inflation rate to the government’s 2% target.
Inflation soared to 9% in April as the surging prices of gas and electricity shot household energy bills to record levels and the increasing cost of transport and food also caused the rise in the cost of living.
The Bank’s nine-strong monetary policy committee has elevated borrowing costs at its last four meetings but Pill used a speech in Cardiff to indicate extra raises were necessary to stop high inflation from becoming rooted in the economy. Pill stated:
“In my view, we still have some way to go in our monetary policy tightening, in order to make the return of inflation to target secure.”
The Bank’s latest estimates for the economy predict the annual inflation rate soaring above 10% in the autumn – a forecast Pill agreed did not make “pretty reading”.
Pill added the effect of high inflation on the low-income households made it all the more crucial for the Bank to take action.
Why the UK has the highest inflation in the G7?
“These are difficult times for many people, especially for the less well off, who spend a higher proportion of their income on energy and food, where recent price rises have been most significant.”
“Current challenges are thus a salutary reminder of the importance of price stability as an anchor for wider economic stability, and a bulwark to sustaining people’s livelihoods, especially for those on lower pay and fixed incomes.”
The Bank lowered official interest rates to a record low of 0.1% during the early stages of Covid-19 pandemic in 2021 but has since lifted them to 1%.
Pill said the risks of contagion effects from high inflation were “obvious” and it is currently time to withdraw emergency support for the economy and go back to higher interest rate levels.
“It is the need for a continuation of this transition in monetary policy that led me to support the 0.25 percentage point hike in bank rate at the May MPC meeting. And, even after this hike, I still view that necessary transition as incomplete. Further work needs to be done.”
Pill said there was tension between two conflicting forces. On the other hand, unemployment was low, inflation “clearly too high”, and wage growth incompatible with reaching the inflation target. On the other hand, huge global rises in the cost of fuel and food were depleting consumer spending power.
“Looking beyond the shorter term, UK inflation is set to fall as global commodity prices stabilize, bottlenecks in global supply chains ease, and domestic inflationary pressure dissipates as the real income squeeze opens up a margin of economic slack.”