Chief economist Huw Pill says tighter monetary policy needed to tackle runaway inflation

Durrant Pate/Contributor

The Bank of England (BOE) is preparing to further raise interest rates in its continuing thrust to tame runaway inflation throughout the United Kingdom.

The BOE’s chief economist, Huw Pill, is indicating that the BOE’s Monetary Policy Committee (MPC) plans to further raise rates, after it carried out the biggest single tightening in 33 years last week when interest rates went up to three per cent. The MPC is expected to make the announcement at its next meeting in December.

Pill is arguing that the need for tighter monetary policy was related to the risk of a “self-sustained” inflationary cycle, where companies continue to raise their prices and workers demand higher wages even after energy prices begin to fall next year. However, there are lingering concerns that, with another rate hike, inflation could become embedded in the British economy, despite the growing risks of a prolonged recession.

More left to be done

In spite of this, the BOE chief economist says there is “still more to do” to tackle soaring inflation but some analysts have said that a further rate increase next month would spell successive decisions to push up borrowing costs at every meeting of the MPC this year. The BOE, through the rate hikes, is responding to inflation, which is currently at the highest levels since the early 1980s.

The intended rate hike next month would mean higher costs for mortgage borrowers after Chancellor of the Exchequer Jeremy Hunt’s autumn statement next week.

Pill is warning of the danger that a “self-sustaining” inflationary cycle could take hold, whereby businesses continue to raise their prices to accommodate higher wage settlements for their workers long after pressure from soaring energy costs fade.

Speaking at a conference in London, hosted by the investment bank UBS, the BOE chief economist remarked: “The tightness in the labour market remains very persistent here in the UK, and that is despite the fact that we already have a slowing economy, and maybe an economy that is in recession at the turn of the year.”

He contended that the BOE “cannot declare victory” against persistent inflationary pressures despite the risks of a recession. The UK Central Bank warned last week that the UK risked being plunged into the longest recession in 100 years by the cost of living emergency, as soaring prices for goods and services force households and businesses to rein in their spending.

Pill acknowledged there was a danger that the Bank could be “blamed for the recession” but insisted that the UK’s monetary authority was being primarily driven by “other forces” including Russia’s war in Ukraine driving up energy costs. However, he suggested that the BOE would still need to take action where it could, even if the causes of inflation were not entirely within its control.

Inflation rose to 10.1 per cent in September, the highest level since 1982, driven up by the rising cost of food and fuel.