The Bank of England will need to raise interest rates further if inflation persists, the central bank’s chief economist has said.
Huw Pill warned of further rises a day after the Bank increased borrowing costs for the first time since the start of the pandemic. He agreed in an interview with CNBC that there will be “a lot more rate hikes to come” if inflation remained at its current level.
“Yesterday was the Bank’s response to a view that . . . underlying, more domestically generated inflation here in the UK, probably centred around cost and wage pressures in a tight and tightening labour market, are going to prove more persistent through time,” he said.
The Bank’s monetary policy committee (MPC) voted 8-1 yesterday in favour of raising the base rate by 15 basis points to 0.25 per cent from its record low of 0.1 per cent.
Inflation figures published on Wednesday showed that prices have been rising at a faster rate than the MPC had anticipated. The consumer prices index was at 5.1 per cent for the year to November, a level that the Bank predicted the economy would not reach until April next year. The prices of fuel, clothing and footwear rose the fastest. Reduced supplies were one cause, with a tenth of groceries either unavailable or low in stock.
Ratesetters increased expectations for inflation to peak at 6 per cent in April next year. The committee expects gas and electricity prices to fuel the rise.
Pill said that Omicron would reverse some of the signs of recovery experienced in the economy in the past few months. “We need to move forward now cautiously, in the sense that we need to assess whether Omicron is going to lead to some reversal of the strength of the dynamics in the economy — and particularly in the labour market — that we have seen over the last six months-plus,” he said.
It is unclear whether the rapidly spreading Omicron variant of coronavirus will increase or soften inflationary pressures, he said, adding: “But I think it is also important to keep in mind that Omicron-related uncertainty is two-sided, at least as it is reflected in our core objective: our ambition in terms of the inflation outlook over the medium term.”
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More interest rate rises on the cards if inflation continues, says Bank of England