Interest rate hikes should be ‘steady’, says Bank’s top economist

The Bank of England’s chief economist has called for a more measured and ‘tough’ approach to raising UK interest rates amid uncertainty over energy prices and inflation exorbitant.

In a speech to the Society of Professional Economists, Huw Pill warned against “unusually large policy moves” as he explained his decision to join the majority on the Bank’s Monetary Policy Committee (MPC) by voting for a quarter point increase to 0.5%.

Four members voted for a half-point increase to 0.75% at last Thursday’s meeting, as the Bank warned inflation was expected to peak at 7.25% in April, the highest level raised since August 1991.

Taking unusually large policy actions can validate a market narrative that Bank policy is either full throttle on the accelerator or full throttle with the brake.

The Bank also clarified that further rate hikes were underway in an attempt to bring inflation back to its 2% target.

But Mr Pill, who replaced Andy Haldane in the role last September, argued it was unclear how far rates would have to rise, given the extreme volatility in wholesale energy markets. and uncertainty about the reaction of wage growth in the months ahead.

He said: “I fear that taking unusually large policy actions could validate a market narrative that the Bank’s policy is either foot on the accelerator or foot on the brake. “

He added: “Limiting ourselves to 25 basis points now – albeit with the prospect of more to come in the coming months – is an investment to contain market expectations of aggressive ‘activism’ which I have deemed useful to do.

“That’s what I would call a ‘tough’ approach to monetary policy.”

Bank of England Governor Andrew Bailey (PA wire)

His comments come after Bank Governor Andrew Bailey sparked a backlash last week after he told Britons not to demand big pay rises this year to help curb inflation.

He told the BBC that while it would be “painful” for workers, some “moderation in wage increases” was needed to prevent inflation from taking hold.

His remarks drew ire from unions as households are set to face the hardest hit with their incomes for at least 32 years, and were seen as particularly callous, given Mr Bailey’s six-figure salary.

Mr Pill said the Bank had announced that raising rates would reduce wage pressures, with the painful but necessary consequence of increasing unemployment and slowing growth, especially when combined with the cut in the cost of living which is already weighing on businesses and consumers.

He said although it was a ‘tough compromise’ it would help bring inflation down ‘without the UK falling into recession’.

But, he added, it was a “call surrounded by uncertainty”.

If wages don’t fall as expected, rates may need to rise more than expected, but also if energy prices fall sooner than expected, rates may not need to rise as much, according to Mr. Pill.

“Retaining flexibility is important,” he said.

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Stephen V. Lee