The Bank of England would do “whatever it takes” to curb inflation, but disagreements in the Monetary Policy Committee (MPC) made it unhelpful to provide guidance on the likely pace, magnitude and timing of rate hikes, the bank said on Wednesday With.
Huw Pill, the BoE’s chief economist, told an audience at King’s College London that he was “in the price stability business” and that the “immediate question for monetary policymakers is whether the pace of monetary tightening needs to change now”. Although Pill voted by a majority to raise interest rates by 0.25 percentage point in June, he said he was ready to increase the pace of monetary tightening.
The BoE expects inflation to rise to around 11% from its current rate of 9.1% in the autumn, and Pill said the resulting hardship for those most exposed to the rising cost of living shows there is ” it is essential that we bring inflation back to target”. .
His comments echoed remarks by BoE Deputy Governor Sir Jon Cunliffe, who told BBC Radio 4 today A program that the central bank would ensure an inflation shock did not leave the UK with high inflation “which is the new normal”.
“We will do whatever is necessary – we will act, and we will act vigorously,” Cunliffe said, using language consistent with wording used in the minutes of the MPC meeting in June. Some economists are interpreting the minutes as an indication that the BoE could hike rates by 0.5 percentage point at its August meeting, rather than the 0.25 percentage point incremental steps it has so far favored.
But Pill said the UK’s situation is different from that of countries more self-sufficient in energy, like the US, and therefore does not face the same medium-term weakness in gross domestic product and inflation.
The BoE may not want to hike rates as aggressively as the Federal Reserve, he suggested, because it needs to weigh “the immediate inflationary impact of higher energy prices” against its “potential disinflationary impact.” . . by weaker incomes and demand in the longer term”.
Pill added that while he was prepared to support larger rate hikes if needed, his vote in August would be dictated by the flow of new economic data and its analysis.
Furthermore, given the uncertainties and current disagreements among policymakers, it is no longer helpful for the MPC to provide guidance on the future path of policy, he argued. Three members of the MPC wanted to raise interest rates by 0.5 percentage points in June, but the last few meetings voted to leave the policy unchanged.
“Using forward guidance of this form requires near unanimity. . . As illustrated by the patterns of individual bank rate votes over the past few months, there is no longer any consensus on the short-term interest rate outlook,” Pill said, adding: “Guidance like this is a trap: attractive at first, but difficult to exit gracefully .”