Bank of England chief economist advocates for sustained high interest rates

The chief economist for the Bank of England, Huw Pill, has underscored the necessity of maintaining high interest rates to counter inflation, despite the recent drop in living costs. Speaking at the Official Monetary and Financial Institutions Forum on Monday, Pill emphasized that persistent domestically driven inflation factors should guide the Bank's efforts to steer inflation back to its 2% target.

In his speech, Pill compared his preferred approach to interest rates to Table Mountain, indicating a lower peak but a longer duration of high rates than market expectations. This strategy represents a departure from the market's anticipation of a sharp peak followed by a rapid decline.

Pill further acknowledged the uncertainties in forecasting, referring to what he termed as the "cloudy peak". He stated that future decisions regarding interest rates would be "finely balanced", suggesting possible additional hikes before the end of the year to achieve the 2% target.

The Bank of England has maintained its benchmark bank rate at 5.25%. The Monetary Policy Committee (MPC), which includes Pill, had agreed to this rate after a series of hikes from a base rate of 0.1%. While supporting this pause in rate adjustment, Pill didn't exclude the possibility of future policy tightening.

Economists are predicting a slight dip in inflation from 6.7% to 6.5% in the upcoming figures. The MPC's next decision will take into account the impact of the Israel-Hamas conflict on oil prices and potential ripple effects of escalating energy costs.

Pill defended the Bank against criticism for its delayed response to inflation, attributing post-Covid lockdown inflation to large-scale shocks such as the pandemic and Ukraine war. He also noted that adjustments in interest rates can take up to two years to fully impact.

Throughout his address, Pill cautioned against premature declarations of victory due to temporary shifts in headline inflation. He reiterated that a sustained response is needed to persistent price pressures, emphasizing the importance of achieving and maintaining the government's 2% inflation target.

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