Bank of England Chief Economist Huw Pill said sticky UK inflation may require a “persistent” monetary response, raising the possibility that the central bank has not yet reached a peak in its interest rate-hiking cycle.
Speaking at an Official Monetary and Financial Institutions Forum event Monday, Pill said the BOE’s Monetary Policy Committee still had “some work to do” in order to get inflation back down to the 2% target, from its current level of 6.7%.
Whereas Pill’s dovish MPC colleague Swati Dhingra said last week that only around 25% of the monetary tightening done by the BOE since it began hiking rates in late 2021 had currently passed through to the economy, Pill said he estimated that more — possibly up to 50% — had filtered through.
Pill said the “persistent components” of inflation — often associated with domestic cost dynamics, rather than external factors such as energy prices — were the BOE’s key focus.
“If we have a persistent component of inflation, it seems natural to me that we have a persistent monetary response to it,” Pill said. “It is important that we do not declare victory prematurely.”
His comments come as the MPC prepares to go into its new forecasting round, ahead of its policy decision Nov. 2. At its last meeting in September, the MPC paused a string of 14 consecutive rate hikes, deciding to hold the base rate at 5.25%.
Traders are betting the BOE will hold rates in November, though they still favor one more hike in the current cycle by early next year. Yields on UK 10-year bonds retreated following Pill’s comments, after advancing to a near one-week high above 4.45%.
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Pill has previously compared the path of UK interest rates to South Africa’s Table Mountain, with a flat top, as opposed to the more steeply peaked Matterhorn in Switzerland.
But in a reference to uncertainty over the path of UK interest rates, Pill said the “top of Table Mountain is very cloudy.” Pushed on the time for which rates would remain high, Pill said the top of Table Mountain would be “as long as necessary, but not too long,” and that the BOE would do what is necessary while avoiding tightening policy by too much and pushing the economy into a recession.
Rates at their current level were bearing down on inflation, he added.
Pill noted that data on wage growth, which have been scrutinized by the MPC as they look for signs that domestic inflationary pressures are becoming embedded, were “mixed.”
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Official wage data had tended to “surprise to the upside”, he said, and were increasingly looking like an “outlier” in that direction.
Wage indicators from a survey by KPMG and the Recruitment and Employment Confederation, however, which look at new hires, looked like an “outlier in the other direction.”
“I do not want to be seen to be against wage growth,” said Pill, adding that wage growth driven by stronger productivity in the economy would be a “good thing.”
--With assistance from James Hirai.
