Inflation could reach 5 per cent, Bank of England economist warns

The central bank policymaker said that the decision whether to raise interest rates in November was a ‘live’ issue

Anna Isaac
Friday 22 October 2021 18:27
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<p>The Bank of England’s rate setters will face a tricky choice at their November meeting</p>

The Bank of England’s rate setters will face a tricky choice at their November meeting

Inflation could climb as high as 5 per cent by early next year, according to the Bank of England’s chief economist, Hugh Pill.

The matter of whether the central bank will raise its key interest rate to try and cool the pace of prices rises at its 4 November meeting was a “live” issue, Mr Pill told the Financial Times in an interview. He would not say which way he intends to vote, the report said.

Rising prices from energy to shipping costs have put pressure on consumers and businesses alike as the global economy continues to face supply chain disruption. The latest official data released on Wednesday showed the Consumer Prices Index rose 3.1 per cent in the 12 months to September – down only slightly from 3.2 per cent for the year to August.

Recent survey data and official figures have suggested that the UK’s economy recovery from the pandemic has lost some momentum. Higher interest rates increase the cost of borrowing and can therefore sometimes dampen growth. There is therefore a tricky balance to be struck between containing inflation with interest rate rises and supporting economic expansion.

“I would not be shocked ... if we see an inflation print close to or above 5 per cent [in the months ahead],” Mr Pill said, adding that this was a “very uncomfortable” position for the Bank, given its mandate to try and contain inflation to 2 per cent.

The economist added: “We’ve entered a different phase. Because there are risks on both sides [from inflationary pressures being too high, or too low], it’s less clear what the direction of monetary policy will be at any one point in time and that’s going to lead, I think, to more controversy and more potential for disagreement within the [Monetary Policy Committee].”

The interview comes after market bets on a November rate rise rose sharply following reports on remarks made by Bank of England governor Andrew Bailey last weekend. Mr Bailey said the policymakers would “have to act” in the face of high inflation, but also noted a range of factors that would weigh in decision making, including how long-lasting the inflationary pressures appeared to be.

Meanwhile, think tank the Institute for Fiscal Studies has suggested that there ought to be a calm reaction to rate rises over the next year.

“Nobody should be getting too excited over reports that the Bank of England may increase interest rates over the next year. Any increases will be tiny relative to the fall in rates over the past 20 years,” said David Sturrock, senior research economist at the IFS.

“Home ownership rates among young adults which have halved over the last 25 years are unlikely to pick up any time soon. Younger generations will remain dependent on parental assistance to get on the housing ladder and accumulate wealth,” he added.

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