Bank of England’s Sole Dissenter Makes Case for Quick Rate Hikes

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(Bloomberg) — The Bank of England should be raising interest rates with greater urgency after entering the Iran war with slowing progress in its battle to bring down inflation, according to its chief economist.

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Huw Pill — the only voice on the Monetary Policy Committee to back higher rates on Thursday — said he was concerned about disinflation “stalling” even before energy prices were pushed up by the conflict.

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The MPC kept rates at 3.75% on Thursday as Pill was outvoted in an 8-1 decision. As oil prices fluctuated wildly in the hours before the announcement, however, minutes showed several rate-setters signaled that they may join the chief economist in considering hikes at upcoming meetings. 

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Speaking at an online briefing on Friday, Pill, who had spoken about his uneasiness with the speed at which the BOE was loosening policy before the war, said the decision to hold rates yesterday left policy in a “relatively good place.” The panel was not a “rabbit frozen in the headlights” amid the uncertainty, he said, but he added that he would prefer policy to be tighter.

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“Personally, I think that the better starting point, given the uncertainties, might be a slightly higher level of interest rates,” he said. “I have a view that we perhaps should be acting a little bit more promptly in responding with higher rates.”

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The BOE laid out multiple scenarios for inflation as it grapples with the intense uncertainty over the endgame for the war. 

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While the BOE believes tighter financial conditions since the US and Israel attacked the Iran are helping to contain the inflationary impact, its models of how policy could respond to the scenarios suggested rates may need to rise. The most pessimistic of the scenarios pointed to sharp increases in borrowing costs to stop a feedback loop in prices as firms pass on higher costs and workers try to bid up wages.

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Pill repeated language used by Governor Andrew Bailey yesterday that the MPC had taken an “active decision” to leave borrowing costs unchanged.

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“We’re not just in a sort of passive wait-and-see mode,” he said. “We’re in a mode of saying, given the uncertainties, this is where we think we should be.”

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Still, Pill said the committee shouldn’t overreact to daily fluctuations in energy prices as the war in Iran boosts volatility. The tightening in financial conditions in markets so far had been “an appropriate response to the inflationary impulse that the events in the Gulf have generated,” he added.

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