Favours continuity in bond reduction pace
The Bank of England’s chief economist, Huw Pill (pictured top), has expressed greater confidence in the UK’s path towards lower inflation, noting a shift in his past assessment of the risks facing the economy.
Speaking at a Pictet Research Institute event, Pill indicated that he now feels “more comfortable” with the inflation outlook than he did earlier in the year.
“It’s always a question of a balance of risks,” he said. “I have been on the side of saying maybe the balance of risks are more on the inflationary side than the disinflationary side. I think, through time, and also as markets reprice, that probably is changing. Personally, I’m more comfortable now than I was six, nine, 12 months ago.”
Headline inflation remained at 3.8% in August, nearly double the central bank’s 2% target. While inflation has moderated from its recent highs, concerns persist about persistent price increases, particularly in services and wages.
At its meeting for September, the bank’s Monetary Policy Committee (MPC) kept interest rates at 4%, with seven members supporting the decision and two advocating for a reduction to 3.75%.
Meanwhile, on the subject of quantitative tightening (QT), Pill has taken a different position from most of his MPC colleagues. QT involves reducing the central bank’s holdings of government bonds, a process started in 2022 after a peak of £875 billion in gilts.
Last week, the MPC voted to lower the bank’s gilt holdings by £70 billion over the next year, reducing the total to £488 billion. Seven members supported this pace, while Catherine Mann preferred a slower reduction, and Pill advocated for a faster pace of £100 billion.
Pill explained his reasoning, highlighting the importance of consistency in the central bank’s approach. “What permits QT to operate ‘in the background’ is the scope for bank rate (as the ‘active instrument’) to establish a policy stance that delivers inflation sustainably at target given the impact of QT on yields,” he said.
“With bank rate away from its effective lower bound and able to change in either direction, this is the environment in which QT has operated in recent years. Operating within our established principles has allowed the market to price the impact of QT and has thereby allowed the MPC to set bank rate to achieve the inflation target given the impact of QT – as well as a multitude of other factors – on the yield curve, bank behaviour and wider financial and credit decisions.”
The Bank of England’s approach to inflation and quantitative tightening influences the cost of borrowing. When the bank maintains or raises interest rates to control inflation, mortgage rates typically remain high or increase. Conversely, if inflation falls and the bank lowers rates, mortgage rates may decrease. The pace of quantitative tightening can also affect long-term borrowing costs, including fixed rate mortgages, by impacting government bond yields.
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