BoE chief economist warns of strong UK ‘inflationary impulse’

Huw Pill, the Bank of England’s chief economist, said on Friday it was “crucial” to ensure the UK avoided stoking an “inflationary psychology” and indicated he supported further interest rate hikes.

With inflation hitting a 40-year high in April, Pill said the rise in prices to more than four times the central bank’s 2% target was “obviously a very uncomfortable situation” and pledged to lower inflation.

But he said the BoE was still grappling with the difficult question of how much inflation would fall on its own as household finances were hit hard by the cost of living crisis and how much more pain was necessary due to higher interest rates.

A key determinant of rising interest rates, Pill said, was whether companies believed they could raise prices without too much consequence and whether people believed they could demand wages. higher without fear of losing their jobs.

“The UK labor market is tight, wages are rising at rates higher than would normally be considered consistent with the inflation target, and business confidence is resilient, partly in anticipation of being able to restore profit margins. In short, inflationary momentum in the UK is currently strong,” Pill said.

He added that this momentum behind the rapid rise in prices has been amplified by Brexit reducing the supply of workers, a setback in globalization and the lasting effects of Covid-19, which have caused almost 500,000 people to leave the country. British labor market.

“It is crucial to avoid any drift towards integrating such an ‘inflationary psychology’ into the pricing process,” Pill said.

He predicted that further interest rate hikes, in addition to the four already granted, would be needed. This would raise rates from the current level of 1% and, by discouraging spending, help lower inflation.

“It was the need to continue this monetary policy transition that led me to support the 25 basis point hike in the Bank Rate at the May MPC meeting,” Pill said. “And, even after this hike, I still view this necessary transition as incomplete. Further work needs to be done. »

Pill is not seen as one of the more aggressive members of the Monetary Policy Committee and voted for a quarter-point interest rate hike this month, unlike three of the nine members who were in favor of an increase of half a point.

He attributed his caution to the forthcoming “substantial squeeze in real incomes for UK residents, which will weigh on future demand and employment”.

But while Pill said he did not want rapid interest rate hikes, it was clear that more increases would be needed to ensure that high inflation rates were not seen as normal in the UK. United.

“It is this commitment that has led me to support monetary policy tightening since I joined the Committee last September, and to signal today that this tightening still needs to continue,” he said. he declares.

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