Bank of England chief economist backs case for raising interest rates


The Bank of England chief economist on Friday said the conditions now existed for him to vote for higher interest rates, but he declined to indicate whether his initial move was likely to be in December or early next year.

Huw Pill said there was unlikely to be any spike in unemployment after the end of the government’s furlough scheme for company workers, the economic recovery was mature and inflation was likely to remain persistently too high if the BoE failed to raise rates.

The central bank’s Monetary Policy Committee surprised financial markets this month by voting to hold rates at the historic low of 0.1 per cent despite surging inflation. The next MPC meetings are in December and February.

Pill said in a speech to the CBI employers’ organisation that the BoE needed “the flexibility to deal with unforeseen events”, noting the new coronavirus variant B.1.1.529 as a potential spanner in the works, but indicated he was minded to vote for a rate rise soon.

“Although supply disruptions weigh on activity, they also create inflationary pressures,” he said.

“The labour market is tight. Given where we stand in terms of data and analysis, I view the likely direction of travel for monetary policy from here as pretty clear.”

Pill’s CBI speech suggested that he, and BoE governor Andrew Bailey, are now minded to vote for rate rises, although they want to retain flexibility on the exact timing after difficulties in the central bank’s recent communications.

“We need to move forward and then re-evaluate where we are and whether that permits or necessitates another step forward,” said Pill, referring to rises in interest rates in questions after his speech.

Bailey told an event at Cambridge university on Thursday: “We have a very tight labour market at the moment, there is no question of that.”

Pill said in his speech that in September the BoE had needed to prepare the ground to raise interest rates from 0.1 per cent if the recovery continued strongly.

“In my view, the ground has now been prepared for policy action,” he added.

Pill repeated on Friday comments from last week that the burden of proof had shifted and he now needed to see reasons not to back a rate rise rather than the case for a hawkish vote.

This is not the first time Pill has signalled he is minded to vote for higher interest rates soon.

Before the MPC meeting this month, he outlined his discomfort with a 5 per cent inflation rate in a Financial Times interview, but instead of voting for tighter monetary policy instead chose to wait.

While Pill said he was being clear about his likely votes on policy in the near future, he added it would be wrong to give a view on how high interest rates might go beyond the next few months, noting it was important for the MPC to feel its way.

“The MPC will need to assess the impact of each policy decision it takes on a step by step basis, and then evaluate if and when further action is needed,” said Pill.

“If data evolve unfavourably and inflation is forecast to fall below target at the policy-relevant horizon, we can remain on hold or reverse course. If data strengthen and inflation is forecast to remain persistently above target, we can continue to raise rates.”

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