Inflation risks mean the central bank can’t afford to sit on the sidelines, suggests Pill
The Bank of England’s chief economist has criticised the “wait and see” approach of some central bank decisionmakers, reiterating his view that restoring inflation to target should be the Bank’s top objective.
Other BoE members including governor Andrew Bailey have flagged risks to economic growth in recent weeks, suggesting that the central bank might persist with a cautious approach as it weighs its next moves on interest rates.
But Pill, speaking at a roundtable discussion hosted by Barclays in Washington, said inflation fears – which have spiked over the past month and a half amid soaring oil prices because of the war in Iran – were by far his biggest concern.
“In my thinking, for all the discussion about trade-offs, which is there and we have to take into account, I think the primacy of keeping inflation towards target and keeping it there needs to be emphasised,” he said.
The BoE’s approach to rates has been under the microscope during the past several weeks. Before the Iran war, financial markets expected either a rate hold or modest cuts before the end of the year – but the eruption of that conflict, and potential upward pressure on inflation, saw expectations suddenly swing in favour of rate hikes.
Pill, however, said monetary policy alone couldn’t mitigate the impact of the war, which experts say could have a huge negative effect on the UK economy – especially because of rising oil prices.
“To the extent that’s permanent… you can’t just smooth your way through it. There will need to be a real adjustment for that, and ultimately monetary policy cannot deliver that real adjustment,” he said.
Markets were buoyed on Friday by the announcement that Iran had reopened the Strait of Hormuz, a vital oil shipping route whose closure spiked oil prices and stoked inflation fears across the world.
Also speaking in Washington this week, Bailey mentioned the risk of a “very big energy shock” and potential price increases ahead, but questioned the need for immediate rate hikes.
“There’s really difficult judgments to be made,” he said. “We’re not going to rush to judgments on those things, because there are a lot of uncertainties around this – not just how it’s going to play out, but also how it’s going to pass through into the UK economy.”
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