BoE's Pill eyes further rate hikes, sees limits to intervention

FILE PHOTO: BoE's Pill, ECB's de Guindos and Fed's Bullard speak at London panel

LONDON (Reuters) -Bank of England Chief Economist Huw Pill said on Wednesday that more interest rate hikes will likely be needed to return inflation to the central bank's 2% target sustainably, echoing previous central bank communication.

"Given the need to contain the risk of greater inflation persistence implied by potential second round effects, further action is likely to be required to ensure inflation will return sustainably to its 2% target over the medium term," Pill said in the text of a lecture to be delivered later on Wednesday.

Pill said he did not envisage raising interest rates to the levels priced in by financial markets ahead of the BoE's Nov. 3 policy decision - which had implied Bank Rate peaking at around 5.25% in the second half of next year.

Pill's comments on the monetary policy outlook hewed closely to the message given by the BoE earlier this month when it raised its main interest rate by three quarters of a percentage point to 3%.

Governor Andrew Bailey said further rate rises were likely to be needed, but that financial markets had priced in too many rate rises in the run-up to the meeting, when they were still feeling the after-effects of the Sept. 23 mini-budget.

The BoE stepped in after the mini-budget to buy 19 billion pounds ($23 billion) of bonds, including long-dated gilts and, for the first time, index-linked gilts, in order to halt a fire sale by pension funds hit by market turmoil.

The BoE is due to begin to sell these bonds back to the market next week, and Pill said interventions to restore market functioning needed to be carefully targeted.

"Central banks must also recognise the limitations of their policy," he said, adding that the BoE had been "in a learning-by-doing phase".

"Central banks should be very wary of assuming responsibility for goals that they do not have the instruments to pursue. Re-establishing market functioning ultimately relies on the behaviour of market participants," he added.

($1 = 0.8290 pounds)

(Reporting by Andy Bruce and David Milliken, Editing by Kylie MacLellan)