Bank of England must not push interest rates too high, its chief economist says

The Bank of England is alive to the risk of pushing interest rates too high, its chief economist has signalled, adding to expectations that it could be nearing the end of a sustained period of rate rises.

Speaking a day after the Bank raised interest rates for a 10th successive time, by 0.5 percentage points to 4%, Huw Pill said the full impact of its rate increases had not yet been felt in the UK economy.

“It is important we do enough to attain our objective to return inflation to within the 2% target,” Pill told Times Radio on Friday.

“But of course it is also important that we guard against the possibility of doing too much. We need to keep that zen-like balance in our objective. We have to recognise that we have done a lot with monetary policy already. Interest rates have risen by almost 400 basis points over a little more than a year. And given the lags in the transmission of monetary policy, there is quite a lot of effects of those rises still to come through. There is a lot of policy in the pipeline.”

Pill said that the welcome fall in wholesale gas prices – after a period when soaring prices fuelled higher energy bills and have been a major factor in pushing UK headline inflation to its current rate of 10.5% – will be felt by households and help cool inflation to 3.5% by the end of the year.

He said inflation should be back within the Bank’s 2% target range by the middle of next year but warned that care needs to be taken to ensure that companies don’t become accustomed to inflation-driving behaviour.

“It is also important to recognise that the committee signalled the need for continued watchfulness. It especially emphasised that it was watchful for signs of further persistence in inflation. The type of inflation that might become embedded in price-setting behaviour [or] wage-setting behaviour and threaten to keep information elevated on a more lasting basis. That is the type of concern we have had; the type of concern we still have.”

Pill also said the Bank of England had not seen any sign of a positive economic impact from the UK’s decision to leave the EU.

He said that while it remains “too early” to tell what the ultimate economic impact would be, the first three years since Brexit had led to the Bank of England’s forecast of a 3-3.5% drop in UK productivity because of trade disruption over a 15-year horizon beginning to happen at a faster rate than expected.

“As yet we have not seen any offsetting effects,” he said, when asked if there had been any positive economic impact of Brexit to date.

The Bank is expecting the UK to enter recession in 2023, albeit a shorter and shallower recession than it was predicting in November.