Bank of England chief economist sees further rate hikes ahead

by | May 20, 2022

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The price of money is headed higher still and the risks are that even further rate rises might be needed, the Bank of England’s chief economist said.

In remarks prepared for a speech at the Association of Chartered Accountants in Wales, Huw Pill said: “In my view, we still have some way to go in our monetary policy tightening, in order to make the return of inflation to target secure.”

Pill also highlighted the uncertainty around the assumptions underlying the Monetary Policy Committee’s policy guidance, not least as regarded energy prices.


“As the drivers of commodity prices shift from the epidemiological to the geopolitical, they are unlikely to prove easier to forecast,” he explained.

“It is all too easy to envisage outturns – such as the introduction of an oil or gas embargo if the conflict in Ukraine were to persist or widen – that would imply commodity prices quite different from those embodied in the MPC forecast, with very different implications for the economy, for the inflation outlook and ultimately for monetary policy.”

The MPC’s projections were calling for constant gas and oil prices beyond the next six months, which in turn mean that – if correct – energy prices’ contribution to UK headline inflation in 18 months’ time will be zero.


That was the main reason why the MPC expected consumer prices will head back towards the 2.0% target in 2023-24.

Against that backdrop, it was critical to avoid inflation expectations becoming unhinged and creating a self-perpetuating cycle of ever higher price setting, the central banker said.

Pill also appeared to voice support for a steady pace of tightening and for avoiding being “hasty”, so as to avoid the Bank of England’s own actions from themselves becoming a disruptive factor.


Applying a similar logic and regarding the running down of the BoE’s balance sheet, he favoured an approach of letting it run “in the background” in a predictable fashion.

Indeed, he believed that the run down might in fact already have been priced into financial markets.

Like his boss, Governor Andrew Bailey, Pill made clear that he was cognisant of the challenges that elevated inflation posed, especially for the less well off.


He also emphasised the importance of the BoE’s 2.0% anchor for inflation and of the central bank’s independence during these testing times.

Coincidentally, on Friday, economists at Bank of America said they now expected one more 25bp hike in Bank Rate in 2022, for a total of four more over the remainder of the year, in June, August, September and November, Dow Jones Newswires reported.

However, the reason for that change in forecasts was the past week’s stronger-than-expected release on UK employment in April.


BofA also took off the table its call for a rate cut in 2023.

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