Interest rates won't fall anytime soon, warns Bank of England chief economist

Hugh Pill said the Bank needed to «get the job done and ensure a sustained and sustainable return» to target rates. Photo: Holly Adams/Bloomberg

Interest rates will need to stay high longer as the Bank of England fights to keep inflation out of the economy, its chief economist has warned.

Hugh Pill said there are more challenges ahead as households and businesses have not yet felt the full impact of higher borrowing costs.

He said the Bank needs to continue its efforts to remove price pressures.

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«Inflation in the UK remains too high, far above the target, and there is no room for complacency,» Mr Pill told a conference of central banks in South Africa.

“The key element is that we in the Monetary Policy Committee [MPC]] need to get the job done and ensure a long and sustainable return of inflation to the 2% target.”

According to him, holding high rates «for a longer period, but in a more sustainable and decisive manner» is the best way to beat inflation.

Mr Pill acknowledged that there is a risk that high rates will cause «unnecessary damage» to the country's economy . Economy. However, the Bank's Chief Economist said fighting inflation was the top priority.

He said: “There is the potential to do too much and unnecessarily hurt employment and economic growth, but at least in my personal opinion, the emphasis at this time is still on ensuring that we are… restrictive enough for quite some time. time to ensure we achieve a long-term return to our target.”

0308 Bank rate hits 5.25

Comments suggest that hopes that interest rates could start falling early next year are unfounded .

The Bank of England raised the MPC. rates from 0.1% in December 2021 to 5.25% in August. Financial markets expect another rise to 5.5% in September.

Inflation fell from a peak of 11.1% last October to 6.8% in July.

Y- Pill warned that core inflation, which excludes volatile food and energy prices, «remains persistently high and is not showing a clear downward trend yet.»

Policy makers are paying particular attention to core inflation because it reflects domestic price factors rather than international factors.

Wage growth, labor market conditions and service price inflation have become «less favourable». lately,” Mr. Pill said.

“It is on this persistent component of inflation that we need to focus.”

While new hires seem to be getting smaller pay raises, overall wage inflation is still accelerating.

UK consumer price inflation against BoE target

At the same time, more companies have moved from yearly price hikes to more regular increases, which could also increase inflation.

As a result, Pill said the Bank may need to keep rates high for a longer period of time to keep inflation down in the economy.

The chief economist said he favors a sustainable plateau where rates remain high and stable. rather than a short-term spike followed by a fall in borrowing costs.

In both cases, inflation is likely to return to 2% or even lower by mid-decade.

Higher interest rates rates It would take 18 to 24 months for rates to fully affect the economy. The effect is gradual as businesses refinance loans at higher rates and homeowners move to higher-priced mortgages.

Mr Pill said: «A lot of policy measures are in the works.»