Successive interest rate rises by the Bank of England are starting to take effect, cooling the labour market and easing inflationary pressures, the central bank’s chief economist said on Friday.
Speaking a day after the BoE raised interest rates to a fresh 15-year high of 5.25 per cent, Huw Pill said headline inflation had started to fall, thanks to lower food and energy prices, and that tighter monetary policy was starting to curb the risks of more persistent inflation becoming embedded in the economy.
“That effort, that monetary tightening . . . is working,” said Pill in an online briefing on the BoE’s latest forecasts. Higher unemployment and lower vacancies would eventually lead to lower wage growth, he said, even though the Monetary Policy Committee still thinks pay is rising too fast to be compatible with inflation returning to its 2 per cent target.
“We have become . . . more data dependent. We’re emphasising that there’s no pre-determined path for interest rates, but rather we are responding as the economy and the data evolve,” Pill added.
Thursday’s 0.25 percentage point increase, which was backed by Pill and five other MPC members, marked the 14th consecutive rise in interest rates since December 2021.
Before the nine-member panel meets on September 21 to vote on a further rise, there will be two more monthly data releases on inflation, and the state of the labour market, which will be key to its decision.
Yet Pill’s comments are likely to reinforce investors’ views that interest rates could be nearing their peak even in the UK, where inflation at 7.9 per cent is still much higher than in the US and eurozone.
He told the briefing that because interest rates were now weighing on the economy, “if the MPC maintains rates in restrictive territory . . . it will continue to weigh on inflation”.
Elizabeth Martins, senior economist at HSBC, said the global “winds of monetary policy” were “blowing in a decidedly less hawkish direction, and despite dealing with some of the highest core inflation and wage growth in the developed world, it seems that the BoE is no exception”.
Martins added that she expected the MPC to raise interest rates only once more, in September, but to keep them high throughout 2024.
The tightening in monetary policy that has already taken place will feed through to UK households more slowly than in the past, because more homeowners have fixed-rate mortgages and will face higher costs only when they come to refinance.
However, the BoE thinks that other ways in which higher interest rates affect the economy — including by strengthening the exchange rate and hitting housing investment — are already visible and taking effect without any unusual time lag.
Asked whether the central bank was worried it might have put the economy at risk unnecessarily by tightening policy too far, Pill said the MPC was trying to balance the risks.
He added that the UK’s struggles with weak productivity, long-term sickness in the workforce and the overhaul of its trading arrangements were among reasons why its economy “cannot grow very fast without risking creating those inflationary pressures”.
Source: Economy - ft.com
