BoE must hold firm in battle against inflation, says top official

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The Bank of England cannot afford to relent in its battle against high inflation just because it sees signs of weakening economic activity, its chief economist told the Financial Times.

Huw Pill said UK monetary policy was in a “difficult phase” as he warned of “stubbornly high” price pressures in the British economy following multiple shocks including the pandemic and the surge in energy costs.

He insisted the Monetary Policy Committee had to resist the temptation to “declare victory and move on” from its battle to quash inflation that at 4.6 per cent in October still remained well above the bank’s 2 per cent target.

“There’s slower growth in activity and employment as we’ve discussed. But because I think that is more supply-driven rather than demand-driven, the weakening of activity is not as associated with easing of inflationary pressures,” Pill said in an interview last week for the FT’s Economists Exchange series.

Key indicators the Bank was focusing on — services inflation and pay growth — remained at “very elevated levels,” he added.

The comments came after Pill this month wrongfooted financial markets by raising expectations for interest rate cuts next year. Pill said at an online event, shortly after the BoE held rates at 5.25 per cent, that investors were not “unreasonable” in expecting the central bank to start cutting rates from next summer.

Andrew Bailey, the BoE governor, subsequently struck a very different tone and told MPs investors were putting “too much weight” on recent data that showed the sharp fall in headline inflation to 4.6 per cent in October.

In the interview, Pill declined to make any comments on the likely path of interest rates, instead focusing on arguments for monetary policy to remain persistently tight. His decisions in September and November to hold rates rather than raising them further had been “very finely balanced,” he said.

Asked about recent data pointing to slower price growth, he said there is “quite a lot of noise in the month-to-month data”.

He added: “When I look at the prints of those indicators through the last few months, I see more evidence of sort of stubborn, high-level rates of inflation or growth that are stronger than we would really see as compatible with price stability, 2 per cent inflation, over the medium term.”

The BoE recently downgraded its assessment of the UK economy’s supply capacity, suggesting it has less ability to grow without inflaming inflation. This had important implications for monetary policy, he said. 

“To the extent that you think that slowing activity, spending and employment growth are associated with a deterioration in the supply performance of the economy, and not just a weakening in demand, you are not opening up that slack, that easing of resource pressures, which will bring domestically generated inflation down,” Pill said.

“The challenge for the monetary policymaker is to ensure that there is enough persistence in the restriction of monetary policy to bring those components of inflation down. [And to do this] at a time when there would be lots of pressure in the face of weaker employment and activity growth and declining headline inflation, to declare victory and move on,” he added.

Read the full Economists Exchange interview

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