The Bank of England’s chief economist said it was too early to say the UK inflation threat had been defeated and that conditions existed in Britain for price rises to remain problematic.
In a hawkish speech to a financial audience in New York on Monday, Huw Pill sent the message that the BoE was not finished yet with raising interest rates because the UK faced numerous challenges at once that would compound each other to heighten the inflationary threat.
Pill said the UK was almost unique in facing a normalisation of interest rates from very low levels, the need to fight strong pricing power of firms, tight labour markets and an energy price crisis.
“The scope for energy price rises to trigger the infamous second round effects in price, wage and cost dynamics . . . is greater when the corporate sector enjoys pricing power and the labour market is tight,” he said.
Repeating the BoE Monetary Policy Committee’s statement from its December meeting that further rate increases “may be required for a sustainable return of inflation to [the 2 per cent] target”, Pill added that his future voting would be influenced by the range of circumstances that suggested inflation was likely to remain persistently high.
“The distinctive context that prevails in the UK — of higher natural gas prices with a tight labour market, adverse labour supply developments and goods market bottlenecks — creates the potential for inflation to prove more persistent,” he said.
