‘No room for complacency’ on inflation: Bank of England’s Pill hints at 15th straight interest rate hike
The Bank of England’s chief economist warned that there was “no real room for complacency” in bringing inflation down back to target, suggesting more rate hikes are in the offing.
Speaking at a research conference in South Africa, Huw Pill said “inflation remains too high, well above target, and there is no real room for complacency”.
While Pill said he drew comfort from the falling headline rate of inflation, he noted core inflation “remains stubbornly high”.
“We on the MPC need to see the job through and ensure a lasting and sustainable return of inflation to the two per cent target,” Pill said.
The Bank of England has hiked interest rates 14 times in a row to bring the base rate to a post-financial crisis high of 5.25 per cent. This has helped the headline rate of price increases fall to 6.8 per cent from a peak of over 11 per cent last year.
However, core inflation – which strips out volatile goods like energy and food – increased last month, coming in at 6.9 per cent, indicating the persistence of price rises.
“It’s that persistent component of inflation that we have to focus on because it’s that persistent component of inflation that will still be with us when the lags in policy transmission unwind,” Pill said.
He said that the rate-setting committee had identified three key indicators of underlying inflation – wage growth, the tightness of the domestic labour market and service price inflation.
“Those indicators of those three phenomena have developed less benignly of late,” Pill said.
Although the initial surge in prices was caused by external factors, such as the impact of the Russian invasion of Ukraine on commodity prices, data suggests that inflation has become increasingly domestically driven.
Persistently high core inflation amid falling energy prices is “symptomatic” of second round effects, Pill said, pointing to the need for further action.
Some economists have argued that inflation is set to fall fairly quickly over the coming months and that hiking interest rates further could damage the economy more than necessary.
Pill admitted that hiking rates too far could cause “unnecessary damage on employment and growth”.
However, he said “the emphasis is still on ensuring that we are…sufficiently restrictive for sufficiently long to ensure that we have that lasting return to target.”
The Bank’s Monetary Policy Committee meets again on 21 September with markets expecting a hike of 25 basis points. The MPC may hike rates one more time before the end of the year.