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The new chief economist of the Bank of England (BoE) has warned that UK inflation is likely to hit or surpass 5% by early next year, fuelling beliefs that interest rates are likely to increase in November.
Huw Pill said that Threadneedle Street would have a “live” decision to make at its next interest rate-setting meeting.
Pill, who took over from former chief Andy Haldane in September, told the Financial Times: “I would not be shocked, let’s put it that way, if we see an inflation print close to or above 5% [in the months ahead].
“That's a very uncomfortable place for a central bank with an inflation target of 2% to be."
He declined to say which way he would be casting his vote on 4 November, but said: "The big picture is, I think, there are reasons that we don't need the emergency settings of policy that we saw after the intensification of the pandemic.”
Investors are currently betting that the BoE will raise interest rates before the end of the year, making it the first major central bank to do so since the start of the coronavirus pandemic. Financial markets have priced in a 15-basis-point rate hike.
Interest rates in the UK have been kept at record lows of 0.1% since March 2020, however, there has been a widening split from policy-makers about how to combat rising inflation.
Watch: What is inflation and why is it important?
According to the Office for National Statistics (ONS), September inflation came in at 3.1%, down from 3.2% in August. Prior to August, the last time overall inflation was at 3.1% or higher was 2017.
The BoE has projected it to rise temporarily in the near-term, to 4% in the fourth quarter of 2021, owing largely to developments in energy and goods prices. But it said CPI inflation was expected to fall back to close to the 2% target in the medium-term.
BoE governor Andrew Bailey recently raised concerns about inflation and said he was uneasy about consumers starting to see the rise as a permanent feature. He said the bank would “have to act” on inflation.
Meanwhile, Catherine Mann and Silvana Tenreyro, members of the Monetary Policy Committee (MPC), struck a “wait-and-see” tone. They warned against an early rise due to a recent surge in energy prices and ongoing supply chain disruptions, which have caused a shortage in materials and components.
They said that the inflationary effects of these issues need to be seen before voting for a rise in borrowing costs.
Tenreyro said a rate hike could be “self-defeating” if inflationary pressures turn out to be temporary.
“By the time interest rates were having a major effect on inflation the effects of energy prices would already be dropping out of the inflation calculation,” she said.
MPC member Michael Saunders said he expects the cost of borrowing to go up “significantly earlier”.
“If some effects were to prove more persistent it would be important to balance the risks from a period of above target inflation with the cost of weaker demand,” he said.
Watch: Will interest rates stay low forever?