The Bank of England has more “work to do” to ensure inflation is brought back under control, Threadneedle Street’s chief economist Huw Pill has said.
Raising the possibility of an increase in borrowing costs from the Bank, Pill said the fact that the headline measure of the cost of living was now falling was not enough to claim victory.
Speaking at an event in London, the Bank official – one of nine members of Threadneedle Street’s interest-rate-setting monetary policy committee – said persistent price pressures had to be met with a persistent response.
The MPC voted five to four to leave official borrowing costs unchanged at 5.25% last month – after 14 successive increases from a low-point of 0.1%.
Pill was one of those voting for the rate pause but could give no guarantee that the policy tightening was over.
“We still have some work to do, in order to get back to (the government’s target of) 2%,” he said. “And we probably have some work to do, to ensure that when we get back to 2% we do so in a way that is sustainable through time.”
The latest inflation figures are due to be published on Wednesday, with the consensus forecast among economists for a drop from 6.7% in August to 6.5% in September.
Pill said the fact headline inflation was now falling was “certainly not sufficient” for the MPC to be able to say that the job was done.
He said: “It is important that we do not declare victory prematurely, just because movements which are relatively mechanical in headline inflation are working their way through.”
The next MPC decision is due early next month and Pill said it would be weighing up the impact of the war between Israel and Hamas on oil prices. The bank’s chief economist said the committee would seek to assess whether a sharp increase in energy prices would have knock-on effects.
“Is an oil price at $150 [£123] a barrel, as we have seen in the past, going to raise petrol prices? Does it imply another cost-of-living squeeze, and does that change pricing and wage-setting behaviour in a way that is self-sustaining?” Oil prices are now at about $90 for a barrel of Brent crude.
Pill said his two years at the Bank had shown him that policymakers did not know what the future would hold.
“If we were to be hit by another persistent shock … of course, monetary policy and other actors in the economy, will have to respond to that,” he added.
Pill defended the Bank against critics who have argued it was too slow to respond to upward price pressures after the end of the Covid-19 lockdowns.
The pandemic and the war in Ukraine war were both big and unexpected shocks, and because it takes between 18 months and two years for changes in interest rates to have their full impact it was not feasible that the Bank could have prevented the surge in inflation.
