(Bloomberg) — Bank of England Chief Economist Huw Pill gave the clearest indication yet that officials think they might be able to pause their rate-hiking cycle, saying inflation has hit a “turning point” and is likely to fall.
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The remarks follow the BOE’s decision on Thursday to lift its base interest rate for a 12th consecutive time to 4.5% in an effort to ward off a wage-price spiral. Inflation hit the highest in four decades last year and remains stuck in double digits, five times the BOE’s 2% target.
Pill said inflation should start to tumble as the base effects of huge energy rises this time a year ago start to fall out of the calculations. Domestic demand, he said, is likely to weaken as mortgage holders feel the impact of higher borrowing costs when their fixed-term deals finish.
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But Pill said the “crucial question” is whether the slowdown will be sufficient to bring inflation back to target, referring to worries over food prices highlighted in Thursday’s Monetary Policy Report.
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“We are seeing evidence in that direction” but this may be “interrupted” by more persistent price pressures, Pill said. “There is at least a question about whether price-wage-cost-setting behavior, and the interaction between those things, will change as a result of the high level of inflation.”
When assessing whether further rate hikes would be needed, Pill said his colleagues on the Monetary Policy Committee were looking at “tightness in the labor market, the behavior of pay growth, and the behavior of services prices.”
Currently these measures had not diverged too far from Bank forecasts, he said, but added that recent data “do not leave too much room for comfort.”
Asked about the Bank’s 2% target for inflation, Pill said it was “still relevant” as it gives a framework for what monetary policy “can and should do”.
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“There’s a danger that monetary policymakers are asked to serve a whole range of different tasks” which they are not suited to, he added, while it should be focused on “creating an environment of price stability.”
He didn’t address the fallout from controversial comments he made last month about Britons needing to accept they’ve become poorer because of the pandemic.
Read more:
- BOE Chief Economist Says UK Needs to Accept It’s Worse Off
- Bailey Admits BOE Chief Economist Was Wrong to Warn of Poorer UK
- UK Cost-of-Living Crisis Fades With Outlook for Higher Incomes
- UK Surveyors See Signs Housing Market Downturn Coming to an End
