Britain’s inflation shock may be worse than feared, Bank of England top economist warns

ryanniesMay 20, 2022

Bloomberg News

Philip Aldrick

(Bloomberg) — UK inflation shock could be worse than feared, as Bank of England chief economist Huw Pill warned that price pressures were “substantial” and that further interest rate hikes were needed. Said that it was high.

In a speech to the Welsh Certified Accountants Association, Pill elaborated on the dilemma facing central banks.

Overall, Pill said, “The risk balance is leaning towards inflation, which has proven to be stronger and more sustainable than expected at its baseline.” The Bank of England expects the inflation rate to reach 10.2% in October, up from the current 40-year high of 9%.

This month’s Monetary Policy Committee raised interest rates to a 13-year high of 1%, and the money markets are pricing 2.5% by this time next year.

On Friday, Goldman Sachs said it expects the benchmark to reach 2.5% instead of 2%.

“Given more sustainable wages and inflationary pressures, we will accelerate and correct the expected path of bank interest rates,” UK Chief Economist Stephenball said in a note to clients. “We are now hoping that MPC will embark on a faster hiking cycle and raise bank rates by 25bps in a series of meetings through February 2023, so we have added two more hikes to our path.”

Pill was the majority of the nine committees voting for a quarter-point increase this month, but three members wanted a 0.5-point increase. He said the pill would need further rate hikes, even though he decided to take prudent measures.

“There are still ways to tackle monetary tightening to ensure inflation returns to its target,” he said. “Acting to reach the 2% inflation target is more important than ever.”

Pill reiterated Governor Andrew Bailey’s observation that the BOE faces “the biggest challenge over the last quarter century.” “Monetary policy is shifting,” he said, although the threat of inflation over the years was negligible.

Push back

But he seems to have declined to comment to Bailey’s MPs this week that the MPC is “powerless” in the face of global inflation. “This emphasis on external factors on UK inflation does not suggest that UK monetary policy will have no effect,” he said.

He argued that the terms of trade shock that Britain faces from the global supply chain turmoil and the pressure on import prices caused by the rise in energy prices due to the war in Ukraine poses a two-sided risk.

On the other hand, they may enter domestic pricing through companies that pass on wages and higher costs. On the other hand, the impact on household income can push down demand and lower prices as spending slows.

“The UK is a net importer of food, energy and commodities, all of which are rising in the market,” Pill said in response to a post-speech question. “What the UK is selling has dropped. This puts pressure on it. The given economic structure can be unavoidable. The Bank of England is to offset the pressure on upcoming income. There are no tools. “

Mr Pill said the threat of rising inflation is a greater risk. Wages are already rising faster than the BOE expected in February, according to Pill, and surveys show that companies can raise prices to protect margins.

He said the unemployment rate has been low for nearly 50 years and the corporate sector is passing on higher costs, especially in “business-to-business” transactions. According to a recent BOE study, “margins are likely to be further strengthened, especially for companies that are not directly facing consumer demand,” Pill said.

“At least next year, the potential impact of the second round on domestic wages and pricing is clear,” he warned. “Behind this assessment, the current momentum in the development of headline inflation in the UK is considerable.”

Bloomberg.com