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The Bank of England’s chief economist has indicated that he will vote to keep interest rates at their current 15-year high of 5.25 per cent for a long period rather than raising them much further.
Huw Pill told an audience at South Africa’s central bank on Thursday that the BoE still had to “see the job through” and be vigilant with “stubbornly high inflation”, but pushed back against financial market expectations that this meant further interest rate rises.
At present, markets are pricing in an increase in the BoE’s policy rate to 5.75 per cent by the end of the year, before lowering it in 2024 and beyond.
In slides that the central bank did not publish, Pill compared possible paths for UK interest rates to the Matterhorn mountain in the Alps, with sharp rises and falls, and Table Mountain in South Africa, with a long period of rates around 5.25 per cent, which the BoE considers to be depressing demand.
Pill — who has voted in favour of higher interest rates at the last 14 meetings of the BoE’s Monetary Policy Committee — said he “tend[ed] to favour the latter” path, resembling Table Mountain, with a “resolute profile [of interest rates] rather than a spike profile”.
If Pill followed his comments with votes at MPC meetings in September and November, it would imply keeping interest rates at 5.25 per cent rather than lifting them further and communicating that they were likely to stay at that level for a long time.
In charts presented alongside the speech, Pill showed inflation falling from July’s annual rate of 6.8 per cent to the BoE’s 2 per cent target if interest rates remained at 5.25 per cent for the next three years.
By contrast, financial markets expect rates to rise to 5.75 per cent this year and fall to 4.25 per cent in three years’ time.
In a sign of his continued hawkish stance, Pill said the BoE’s emphasis was “still on ensuring we are sufficiently restrictive for sufficiently long to meet out target”, adding: “Core inflation remains stubbornly high and doesn’t show any obvious decline.”
But he said a smoother path for rates remaining high for longer was preferable because it lowered the risks to financial stability, squeezed the economy more gently and transmitted higher rates into two- and five-year fixed rate mortgages more effectively. These are the most common lending vehicles on property in the UK.
The BoE warned last week that British companies faced a higher risk of default as a result of tighter monetary policy, with 70 per cent of medium-sized companies likely to suffer debt-servicing stress if rates went above 6 per cent.
Pill’s speech did not move financial markets, with sterling and government borrowing costs little changed in morning trading on Thursday.
BoE insiders say there is, as yet, no settled internal view on whether to rapidly raise interest rates or allow them to squeeze demand slowly now they are in restrictive territory.
Ben Broadbent, BoE deputy governor for monetary policy, said on Saturday that to bring down high inflation, “monetary policy may well have to remain in restrictive territory for some time yet”.
