BOE Chief Economist Says Rates Must Stay ‘Sufficiently High’ for Some Time 

The Bank of England’s chief economist signaled UK interest rates may not have to rise much further to contain inflation that he said remains far too strong.

(Bloomberg) — The Bank of England’s chief economist signaled UK interest rates may not have to rise much further to contain inflation that he said remains far too strong.

Huw Pill told an audience in South Africa that he preferred a “Table Mountain” profile for UK rates, where they remained moderately high for some time rather than escalating rapidly and then dropping quickly.

The remarks in Cape Town, referring to the flat-topped landmark that overlooks the city, are an unusually clear description for how the official expects monetary policy to evolve in the coming months. While US Federal Reserve board members release “dot plots” showing their expectations, the nine people serving on the BOE’s Monetary Policy Committee rarely give such clear guidance.

Money markets eased wagers on the scope for further interest-rate hikes. A quarter-point hike next month remains almost fully priced, but bets on the peak rate slipped to around 5.78%, down around 10 basis points from before Pill spoke.

Pill said there were multiple paths that monetary policy could take in order to get inflation back to the 2% target.

One was more like the Swiss mountain Matterhorn, he said, where rates would rise quickly and steeply in order to restrict demand but then would fall rapidly as inflation dipped back to target. 

Pill said he prefers the Table Mountain option for rates because it “imposes fewer risks to financial stability” and due to its effect on mortgage costs.  

“Crucially, I think in the UK, it’s more effective at ensuring that we see transmission through the two to five-year maturity rates that have become very central to the way the mortgage market and private borrowing operates,” he added.

What Bloomberg Economics Says …

“Although there are risks that a pause comes earlier than we anticipate, Pill’s comments contained little news on the policy outlook. The central bank’s revealed preference continues to be erring on the side of doing too much rather than too little. With cost pressure in the UK economy set to remain sticky in coming months, our base case remains that rates will peak at 5.75% in November.”

—Ana Andrade, Bloomberg Economics. Click for the INSIGHT.

Pill said UK interest rates need to remain “sufficiently high for sufficiently long” to get inflation down sustainably to 2%, reiterating a phrase Governor Andrew Bailey used at the time of the BOE’s last decision on Aug. 3. Pill also noted a risk that the BOE would over-tighten monetary policy in its battle to get inflation down, delivering unnecessary damage to the economy.


But he said that the MPC needed to “see the job through,” and repeatedly noted that core inflation was “stubbornly high,” which implied that inflation is being further fueled by second-round effects such as workers bidding up their wages.

On getting inflation back down to 2%, from its current level of 6.8%, Pill said: “We certainly need to ensure that we do enough with policy to make that the case.”

He added that monetary policy “is in restrictive territory,” and that there “is the possibility of doing too much and inflicting unnecessary damage on employment and growth.”

“But at least in my personal view, at present, the emphasis is still on ensuring that we are, in the words of the MPC’s last statement … sufficiently restrictive for sufficiently long to ensure that we have that lasting return to target.”

Read more: Adviser to UK Chancellor Urges Rethink on BOE’s 2% CPI Target

–With assistance from Andrew Atkinson, Alex Mortimer and Alice Gledhill.

(Updates with comment from Bloomberg Economics.)

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