LONDON (Parliament Politics Magazine) – The Bank of England will tighten its grip on the economy in the coming months as it attempts to lower the highest inflation rate in 40 years, according to its chief economist.
Huw Pill said “additional work” was needed for bringing the annual inflation rate back to the government’s 2% objective, noting that Threadneedle Street was facing its hardest struggle since independence in 1997.
Inflation hit 9% in April, with rising gas and power prices pushing family energy expenses to new highs, as well as rising food and transportation costs which added to the rise in the living cost.
The nine strong monetary policy committee of the bank has raised the cost of borrowing in each of the previous four sessions, but Pill said in a speech in Cardiff that more rises were needed to avoid excessive inflation becoming ingrained in the economy.
In his opinion, they still had ways to go in terms of tightening monetary policy to ensure that inflation returned to goal, Pill added.
According to the Bank’s most recent economic estimates, annual inflation will rise above 10% in the autumn, a prediction Pill agreed did not make “pretty reading.”
The effects of high inflation on low-income people, according to Pill, makes it much more necessary for the Bank to intervene.
These times were difficult for many individuals, particularly the less fortunate, who spend a higher percentage of their income on food and energy, where recent price increases have been the most pronounced.
The current issues served as a timely reminder of the significance of price stability as a bulwark for sustaining the livelihoods of people, particularly for those on fixed incomes and lower pay.
During the early phases of the Covid-19 pandemic in 2020, the Bank dropped the official rate of interest to a record low of 0.1 percent, but has subsequently raised them to 1%.
Pill stated that the risks of inflationary spillovers were clear, and that it was now time to eliminate emergency economic support and return to higher interest rates.
He supported the 0.25 percentage point raise in the bank rate at the May MPC meeting because he believed this change in monetary policy must continue. Even after that hike, he still saw that crucial transformation as unfinished. There was still more work to be done, he said.
Pill said that two opposing forces were at odds. On the one hand, inflation was obviously excessive, unemployment was low, and wage growth was out of line with the inflation target. On the other hand, significant worldwide increases in the cost of fuel and food were feeding on the spending power of the consumer.Â
“In the short run, UK inflation was expected to reduce as global commodity prices stabilised, global supply chain bottlenecks eased, and local inflationary pressure evaporated as the real income squeeze opened up a margin of economic slack, Pill added.
