The Bank of England chief economist indicated that he would vote to maintain interest rates at the current high of 5,25 percent for a longer period of time rather than raise them.
Huw Pil said to an audience of South Africa’s Central Bank on Thursday that BoE had to continue “seeing the job through”, and remain vigilant in the face of “stubbornly higher inflation”. He also resisted the financial market expectation that this would mean further interest rate increases.
Markets are currently pricing in a rise in the BoE policy rate by the end the year to 5.75 percent, followed by a decrease in 2024.
Pill compared the possible path of UK interest rates with the Matterhorn in the Alps with its sharp rises and drops, and Table Mountain, in South Africa with a period with rates at 5.25 percent, which is what the BoE believes to be depressing the demand.
Pill, who has voted for higher interest rates in the past 14 meetings of the BoE Monetary Policy Committee, said that he “tend[ed]” to favor the latter path, which resembles Table Mountain with a “resolute [interest rate] profile rather than a spike-profile”.
If Pill voted in accordance with his comments at the MPC meetings of September and November, this would mean that interest rates were kept at 5.25 percent rather than raised further. It would also communicate that they are likely to remain at that level for quite some time.
Charts presented with the speech showed that inflation would fall from the annual rate of 6.8% in July to the BoE target of 2% if rates were held at 5.25 percent for the next three year.
Financial markets, on the other hand, expect rates to increase to 5.75 percent this year and to fall to 4.25 percent in three years.
Pill, in a sign that he was continuing his hawkish position, said the BoE “still focuses on making sure we are sufficiently restrictive for a long enough time to achieve our target”. He added: “Core Inflation remains stubbornly high and does not show any apparent decline.”
He said that a more gradual path of rates remaining high was better because it reduced the risk to financial stability. It also squeezed the economy less and more effectively. The most common types of lending on UK property are these.
The BoE warned that British firms faced a greater risk of default due to tighter monetary policies. 70 percent of medium-sized businesses would be likely to experience debt-servicing stresses if rates rose above 6 percent.
The morning trading of Thursday did not show any significant changes in the markets following Pill’s speech. Sterling and government borrowing costs were little altered.
Insiders at the BoE say that there is no consensus yet on whether or not to raise interest rates rapidly, or to allow them to slowly squeeze demand now that they are in restrictive terrain.
Ben Broadbent said that the BoE’s deputy governor of monetary policy stated on Saturday that in order to reduce high inflation “monetary policy might well need to remain restrictive for some time”.
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