BOE Chief Economist Says Key Rate Likely to Rise Again in Coming Months

(Bloomberg) --

Bank of England Chief Economist Huw Pill said U.K. interest rates will probably rise again in the coming months, although cautioned against expecting aggressive hikes.

Speaking on Bloomberg TV the day after the BOE increased interest rates to 0.5% in its second successive hike, Pill said the bank as working to ensure that the U.K. didn't suffer so-called second-round effects from high inflation.

“As long as things play out broadly as we expect, we would expect to see a further modest tightening of monetary policy which would embrace a rise in bank rate,” Pill said in an interview Friday with Bloomberg Television.

Still, Pill cautioned that BOE forecasts showed inflation would drop below target in the future, and drew attention to Governor Andrew Bailey's comments that markets shouldn't get carried away. In an event later Friday, he said “one shouldn't anticipate that interest rate rises are going to be aggressive in the medium term.”

That message is so far falling on deaf ears with markets, who are currently pricing in further rate rises at the BOE's next four meetings -- taking the rate to 1.5% by August -- and a further move in December. That degree of tightening would be the fastest since the central bank gained independence.

Investors turned more aggressive on hikes after some BOE officials pushed for an even bigger move on Thursday, pushing for an unprecedented 50-basis-point hike. That came as the central bank predicted inflation will hit 7.25% in April, and the U.K. faces a cost of living crisis that by one metric will leave incomes squeezed by the most in at least 30 years.

Pill said on Bloomberg TV Friday that monetary policy can't fix inequalities in society and said that the BOE's best contribution would be to limit inflation. He also declined to criticize a suggestion from Bailey that workers should show restraint in asking for pay increases.

“Given the nature of the shock we're facing, real incomes in the U.K. will suffer to some extent. That's unavoidable,” he said. “Monetary policy can and should focus on ensuring that we don't see a repeated attempt, which is inflation generating, by different groups, different, workers, firms etc to try and shift the burden of that shock onto others, like pushing up their wages, pushing up their margins,” he said.

Later Friday, Pill said he expects wage growth to moderate going into 2023, a factor that will ease upward pressure on inflation.

Read More: BOE's Huw Pill Says Growth in U.K. Wages Is Likely to Moderate