Bank of England hints at higher interest rate rises to come
Borrowers may face bigger interest rate rises in the coming months as Bank of England officials prepare to speed up monetary tightening over stagnation fears.
Huw Pill, the central bank’s chief economist, said he was willing to adopt a “faster pace” of tightening than the Bank had implemented in the past few months.
The Bank has increased interest rates by 0.25 percentage points, or 25 basis points, in each of its past five meetings since December, when it began the process of monetary tightening. It is set to publish guidance on how it will wind down its asset holdings next month, as part of wider plans to withdraw stimulus and cool the economy and try to curb rampant inflation.
Prices rose by 9.1 per cent in the year to May, with inflation set to peak at more than 11 per cent in October, when energy bills rise, according to Bank forecasts.
The Bank’s monetary policy committee said in the minutes of its meeting last month that it was ready to act “forcefully” to tackle inflation if needed.
“The statement reflects both my willingness to adopt a faster pace of tightening than implemented thus far in this tightening cycle, while simultaneously emphasising the conditionality of any such change,” Pill said in a speech at a central banking conference hosted by King’s Business School in London today.
A rise of 0.5 percentage points would be unprecedented in the 25-year history of the committee. Michael Saunders, Catherine Mann and Jonathan Haskel voted to raise rates by such a margin in the last meeting, but were outvoted by the majority, including Pill, who opted to stick with a smaller rise. Pill has not voted for a 0.5-point rise in his two years on the committee.
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The Federal Reserve raised rates by a margin of 0.75 percentage points last month for the first time since 1994, and the European Central Bank has indicated that it would be open to a 0.5-percentage point rise in September.
Pill, a former Goldman Sachs economist, said the Bank had to balance the risk of a long-term economic slowdown against the dangers arising from “uncomfortably high” inflation, which could become embedded in the expectations of business owners and members of the public.
“Risks to the economic outlook are two-sided,” he said. “The current squeeze on real income threatens to create slack and downside risks to inflation further out.”
Pill echoed the sentiment expressed by Jon Cunliffe, the Bank’s deputy governor for financial stability and a fellow committee member, who said earlier in the day that the Bank would do “whatever is necessary” to tackle inflation.
He told Today on Radio 4 that the shock the economy was experiencing was “very different” from the financial crisis of 2007-08, which “was followed by a very deep and very long recession”. This time, he said, “what we expect is that the cost of living squeeze will actually hit people’s spending and that will start to cool the economy, and we can see signs that the economy is already slowing”.
Cunliffe voted for a 0.25-point rate rise last month, and was the only committee member to vote to hold interest rates rather than raise them in the month after Russia’s invasion of Ukraine rocked global markets.
The Bank expects economic growth to be flat over the next year, he said, adding: “That’s a very different picture to the picture we saw 2009 to 2011. It’s a picture of a slow economy, where people can’t spend, they cut back on spending because of the cost of living squeeze.”
Quoted from Various Sources
Published for: Ipodifier