Huw Pill warned against ‘unusually large policy steps’ after four of the Bank’s policymakers voted last week for a half point rise in rates.
09 February 2022
The Bank of England’s chief economist has called for a more measured and “steady handed” approach to raising UK interest rates amid uncertainty over sky-high energy prices and inflation.
In a speech to the Society of Professional Economists, Huw Pill warned against “unusually large policy steps” as he explained his move to join the majority on the Bank’s Monetary Policy Committee (MPC) in voting for a quarter point rise to 0.5%.
Four members voted for a half point rise to 0.75% at last Thursday’s meeting as the Bank warned that inflation was set to peak at an eye-watering 7.25% in April – the highest level since August 1991.
The Bank also made it clear that more rate hikes were on the way to try and bring inflation back to its 2% target.
But Mr Pill, who replaced Andy Haldane in the role last September, argued it was unclear how high rates would need to go, given extreme volatility in wholesale energy markets and uncertainty on how wage growth would react in the coming months.
He said: “I worry that taking unusually large policy steps may validate a market narrative that Bank policy is either foot-to-the-floor on the accelerator or foot-to-the-floor with the brake.”
He added: “Restricting ourselves to a 25 basis points now – albeit with the prospect of more to come in the coming months – is an investment in containing market expectations of aggressive ‘activism’ that I saw as worth making.
“That is what I would label a ‘steady handed’ approach to monetary policy.”
His comments come after Bank governor Andrew Bailey sparked a backlash last week after telling Britons not to demand big pay rises this year to help curb inflation.
He told the BBC while it would be “painful” for workers, some “moderation of wage rises” was needed to stop inflation from becoming entrenched.
His remarks incurred the wrath of trade unions as households are set to face the worst hit to their income for at least 32 years, and were seen as being particularly insensitive, given Mr Bailey’s six-figure salary.
Mr Pill said the Bank has made the call that raising rates will push down on wage pressures, by having the painful but necessary consequence of increasing unemployment and slowing growth, especially when added to the cost of living squeeze already weighing on firms and consumers.
He said while a “difficult trade-off”, this would help bring down inflation “without the UK falling into recession”.
But, he added it was a “call surrounded by uncertainty”.
If wages do not fall as forecast, then rates may need to rise higher then expected, but equally if energy prices ease back sooner than expected, than rates may not need to rise by as much, according to Mr Pill.
“Retaining flexibility is important,” he said.