BLOOMBERGÂ
The Bank of England (BOE) Chief Economist Huw Pill said officials may need to raise interest rates even as inflation falls to prevent resurgence in prices caused by households and companies trying to claw back their lost income.
Inflation is set to drop sharply from the current 10.4% level in the coming months due to lower energy prices and base effects, as last year’s sharp price jumps are not repeated.
But policy makers need to be alert to the risk of “a self-sustaining momentum in headline inflation which justifies a monetary policy response, even as the initial impulse from the energy price recedes,†Pill said.
The BOE has raised rates at 11 consecutive meetings from 0.1% to 4.25%, the fastest tightening cycle since the late 1980s, and market pricing suggests it is close to pausing, with one more quarter point increase expected.
However, Pill argued that further action may be necessary if there is evidence of “inflation persistence.†UK households are only just emerging from the steepest fall in living standards since the 1950s, workers are striking to drive up pay, and private sector wage settlements are the highest they have been in decades.
Pill said policymakers need to understand what will drive inflation in 12 to 24 months, not the immediate outlook.