The Bank of England appears to have move a step closer 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”, despite fears over the new Covid strain.
Pill, a member of theBank’s nine-strong monetary policy committee (MPC), indicated he was preparing to vote in favour of an increase in interest rates on 16 December after official figures suggested concerns about a jump in unemployment at the end of the furlough scheme had proved unfounded.
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 was minimal. “In my view, the ground has now been prepared for policy action,” he said.
The former Goldman Sachs economist, who joined the central bank in September, said 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.
Bank forecasts suggest the consumer prices index (CPI) will hit 5% next spring, having risen to 4.2% in October.
Pill 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.
“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%, but signalled rates would have to be increased by at least 0.5% over the next year to bring inflation down to a 2% target durng the next couple of years.
Several analysts said the prospect of a rate rise had diminished after the discovery of a new Covid-19 variant in southern Africa which triggered a slump in global stock markets.
While Pill did not address the threat to the recovery from a new potentially deadly version of the virus, analysts said moves by the EU and Britain to block flights to southern Africa could have a negative economic impact.
Andrew Godwin, the chief UK economist at the consultancy Oxford Economics, 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.
“It’s too soon to be clear about the health consequences of the new variant. But the latest Covid developments leave us more confident that the MPC will wait until next year before hiking rates.”
Simon French, the chief economist at the stockbroker Panmure Gordon, said: “The potentially fast-spreading variant throws a spanner in BoE’s December policy decision.”
In the weeks before the new variant was discovered, the financial markets placed a 93% probability on UK interest rates increasing on 16 December. On Friday, investors lowered their expectations to a 63% probability.
French said the likelihood of fresh restrictions on western economies to contain the new variant meant the likelihood of an interest rate rise would recede further over the coming weeks.