The new chief economist of the Bank of England (BoE) has warned that the resurgence of the coronavirus pandemic would mean that it would have to be more cautious, but that the ground is prepared for a rate hike.
Huw Pill, who took over from former chief Andy Haldane in September, said the way was now clear for Threadneedle Street to raise UK interest rates for the first time since the start of the health crisis last year.
He was speaking to the Confederation of British Industry (CBI) in Newcastle on Friday.
“In my view, the ground has now been prepared for policy action," he said in his very first speech since joining the BoE’s Monetary Policy Committee (MPC). “It’s a challenging time for monetary policy. Joining the Bank at this moment has proved something of a baptism of fire.”
At the start of November the MPC kept UK interest rates at its current historic low of 0.1%, voting by a majority of 7-2 to maintain the Bank rate as it is, despite widespread anticipation it would increase the rate to 0.25%.
The UK's main interest rate has been at an all-time low of 0.1% since the pandemic began, having been fixed at 0.75% pre-pandemic. A rise to 0.25% would have been the second lowest rate the Bank has ever been set.
Watch: Will interest rates stay low forever?
Analysts have said that they expect the rate to be hiked to pre-pandemic levels in the next 18 months as the economy resumes a more steady course.
Pill was one of the seven MPC members that voted to hold rates at 0.1% to wait and see how the jobs market and economy fared.
He has since defended the Bank’s 7-2 split, saying it was a "healthy reflection of the strength of the system".
On Friday, he did not give any indication on the likelihood of the Bank increasing the cost of borrowing at its December meeting on 16 December.
“My main message here is that we should be cautious in offering guidance on the path of bank rate at these longer horizons.
"Better to focus our analysis and communication on an assessment of the economic situation and its implications for inflation as it unfolds, as reflected in the MPC’s forecasts published each quarter,” he said.
“However much we flag that any guidance on bank rate is conditional on how circumstances evolve, the danger exists that guidance will be interpreted as a commitment, and the necessary policy flexibility will be compromised.”
To make sure inflation doesn’t stay too high for too long, it’s likely we’ll need to raise interest rates gradually in the coming months, says Huw Pill. We’ll need to take a step-by-step approach to how much and when, based on proof of economic recovery. https://t.co/cUIcG521pO pic.twitter.com/j3bNE63gLo
— Bank of England (@bankofengland) November 26, 2021
He also pointed to the fact that the British economy was continuing to recover but supply chain disruptions and a tight labour market were adding to inflationary pressures.
The economist added: “I believe that the uncomfortably high inflation rates we will face in the coming months, mainly reflected temporary factors such as the pandemic-driven supply bottlenecks, which are likely to ease as the health situation improves.”
Inflation, as measured by the annual rise in the consumer price index (CPI), was 4.2% in October. The BoE’s latest forecast projects inflation to peak at around 5% in the second quarter of 2022, more than double its target of 2%.
Pill told the CBI that if the UK jobs markets stayed strong, interest rates would have to gradually increase.
“We know where we are headed: towards the 2% inflation target. We know that the passage there will be challenging, with strong currents and hidden undertows all threatening our progress,” he said.
“But rather than identifying a point mid-river that we forge towards with no regard for the fast-moving eddies encountered along the way, it is better to adopt a step-by-step approach, where we ensure our feet are securely anchored on the slippery river bed, before inching further forward.
“Reacting to the ebbs and flows of the current. Showing caution rather than bravado. Learning by doing. These are the secrets to safely reaching the other side.”
His speech follows comments from BoE governor Andrew Bailey earlier this month who admitted that he was “very uneasy about the [inflation] situation”, adding that growth in the British economy is starting to “flatten out”, meaning that Britain was facing more “two-sided risks” than before.
Watch: What is inflation and why is it important?