The Bank of England would do “whatever is necessary” to contain inflation, but splits on the monetary policy committee (MPC) made it unhelpful to give guidance on the likely pace, scale and timing of interest rate rises, rate-setters at the central bank said on Wednesday.
Huw Pill, the BoE’s chief economist, told an audience at King’s College London he was “in the price stability business” and that the “immediate issue for monetary policymakers is whether the pace of policy tightening now needs to change”. Although Pill voted with the majority for a 0.25 percentage point rate rise in June, he said he would be willing to step up the pace of policy tightening.
The BoE expects inflation to rise from its current rate of 9.1 per cent to about 11 per cent in the autumn, and Pill said the resulting hardship for those most exposed to rising living costs showed it was “essential we bring inflation back down to target”.
His comments echoed remarks by BoE deputy governor Sir Jon Cunliffe, who told BBC Radio 4’s Today programme that the central bank would ensure an inflationary shock did not leave the UK with high inflation “being the new normal”.
“We will do whatever is necessary — we will act and we will act forcefully,” said Cunliffe, using language that matched wording used in the minutes of the MPC’s June meeting. Some economists read the minutes as a hint that the BoE could raise interest rates by 0.5 percentage points at its August meeting, rather than the more incremental 0.25 percentage point moves it has favoured until now.
However, Pill said the UK’s situation was different from that of countries more self-sufficient in energy, such as the US, and so did not face the same medium-term weakening in gross domestic product and inflation.
The BoE might not want to raise interest rates as aggressively as the US Federal Reserve, he hinted, because it needed to balance “the immediate inflationary impact of higher energy prices” against their “potential disinflationary impact . . . through weaker incomes and demand at longer horizons”.
Pill added that while he was willing to back bigger rate increases if needed, his vote in August would be determined by the flow of new economic data and analysis of it.
Moreover, because of the uncertainties and the current split of opinion among policymakers, it was no longer helpful for the MPC to give guidance on the future path of policy, he argued. Three members of the MPC wanted to raise interest rates by 0.5 percentage points in June, but votes have been cast in recent meetings for leaving policy unchanged.
“Using forward guidance of that form requires near-unanimity . . . As the patterns of individual votes on bank rate in recent months reveals, unanimity about the short-term interest rate outlook no longer exists,” said Pill, adding: “Such guidance is a trap: attractive at the outset but difficult to exit from gracefully.”
Source: Financial Times