The Bank of England seems to be set towards increasing the cost of borrowing next month after its new chief economist, Huw Pill, said the UK’s recovery from the pandemic was strong enough for the central bank to take “policy action”.
Member of the bank's nine-strong monetary policy committee (MPC), Pill indicated he was preparing to vote in favour of an increase in interest rates on December 16 after official figures suggested concerns about a jump in unemployment at the end of the furlough scheme proved futile. Speaking at a CBI conference in Tyne and Wear, Pill said he wanted to increase interest rates to calm inflation if the potential hit to the economy has minimal.
“In my view, the ground has now been prepared for policy action,” Pill said. He added there was a risk workers would react to rising inflation by demanding higher wages, feeding into a wage-price spiral that would damage the economy.
He said, “Recent indicators point to a further tightening of the labour market. On this basis, the end of furlough is, of itself, unlikely to dent the high level of vacancies, ease bottlenecks or weigh on the elevated level of underlying wage growth that characterise the labour market at present.”
He added, “In other words, given where we stand in terms of data and analysis, I view the likely direction of travel for monetary policy from here as pretty clear.” The MPC surprised investors earlier this month by voting to maintain the central bank’s base rate at 0.1 per cent, but signalled rates would have to be increased by at least 0.5 per cent over the next year to bring inflation down to a two per cent target during the next couple of years.
Chief UK economist at the consultancy Oxford Economics, Andrew Godwin said, “Ordinarily, the strength of recent survey evidence would have tilted the balance further toward a rise in (the base rate) next month. But the discovery of a new Covid variant and the resulting market turmoil has thrown that prospect into doubt.”
