Huw Pill, the Bank of England's chief economist, has negated the need for additional interest rate hikes, affirming that the current restrictive monetary policy is effectively managing inflation. His remarks were made during an event by the Institute of Chartered Accountants in England and Wales on Thursday, November 09, 2023.
The Bank of England has implemented 14 rate increases since late 2021, driving borrowing costs to a record-breaking high of 5.25% for 15 years. Despite this, inflation remains notably above the bank's 2% target, having dropped from its October 2022 peak of over 11% to a stubbornly persistent 6.7%.
Pill highlighted that high levels of domestic inflation indicators such as wage growth and services inflation were inconsistent with the bank's inflation target. He noted no decisive turn in domestically driven services price inflation yet but acknowledged the effects of monetary policy in reducing inflation. He anticipates that official consumer prices data due next week will show inflation falling below 5%.
Last week, the Monetary Policy Committee kept rates steady for the second time and revised its growth forecast downwards, leading markets to remove future rate hikes from their expectations. Traders predict a rate cut in the second half of 2024, a notion dismissed by BOE Governor Andrew Bailey as premature.
However, Pill insisted on maintaining the current restrictive monetary policy to meet the inflation target by the end of 2025. He suggested that sustaining interest rates at their current level would achieve the desired 2% inflation within two years. His comments sparked debates about when central banks will start reducing rates. While Pill considered market expectations for rate cuts next summer reasonable, Governor Bailey disagreed, asserting it was too early for such discussions.
Pill clarified that central bank communications on monetary policy outlooks should be viewed as plausible scenarios rather than firm commitments. Both Pill and Bailey recognized external influences such as events in the Middle East and a tight labour market on their decision-making process.
The post-pandemic inflation surge led to an increase in interest rates to a post-financial crisis high of 5.25%. The tight labor market is causing an expectation that inflation will only reach its target by the end of 2025. Pill credits both global developments and monetary tightening for this decline but warns of high domestic price growth and more persistent inflation than initially estimated.
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