Inflation could hit 5% in coming months, BoE’s new chief economist warns

The Bank of England’s new chief economist has warned that inflation could hit 5 per cent in the coming months.

Huw Pill told the Financial Times that the Bank would face a ‘live decision’ on whether to raise interest rates at its next meeting in November, although he declined to say how he would vote. 

The Bank has previously said inflation was likely to rise above 4 per cent – more than double its target – but since it made that forecast, energy prices have risen further.

Warning: Huw Pill said he would not be ‘shocked’ to see inflation ‘close to or above 5%’

Official figures this week showed the cost of living climbed by 3.1 per cent in September – slightly slower than the 3.2 per cent rise in August.

But analysts warned that it was the ‘lull before the storm’, with inflation expected to rise further in the coming months as household energy bills continue to soar alongside the price of food and fuel. 

‘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). And that´s a very uncomfortable place for a central bank with an inflation target of 2% to be,’ Pill told the FT. 

He also said that markets should look at the UK’s underlying economic trends, adding that they no longer need interest rates at the record low of 0.1 per cent

‘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,’ Pill said. 

According to the report, Pill suggested that rates would not need to move much higher than their pre-pandemic level of 0.75 per cent.

‘We do not see, given the transitory nature of what we’re seeing in inflation in our base case, a need to go to a restrictive [policy] stance,’ he said.  

Rising inflation: Official figures this week showed the cost of living climbed by 3.1% last month

Inflationary pressure on prices has continued for longer than the bank had first anticipated.

Pill recently told MPs that the ‘magnitude and duration’ of the inflation spike was proving ‘greater than expected’. 

It comes as the Bank’s governor, Andrew Bailey, said on Sunday that the rise in inflation was still likely to prove transitory but that the central bank would have to act to contain the risks.

Speaking to the G30 group of international economists and central bankers on Sunday, Bailey said that monetary policy ‘will have to act and must do so if we see a risk, particularly to medium-term inflation and to medium-term inflation expectations’. 

Economists at JP Morgan and Goldman Sachs both recently said they think a November rate rise is likely. 

But Danny Blanchflower, an economist and former member of the Bank’s rate-setting Monetary Policy Committee (MPC), said officials would be ‘foolish’ to raise rates so soon – and could even risk plunging the economy back into a recession.

The Bank slashed rates to a record low of 0.1 per cent last year to encourage spending during the Covid slump.    

This post first appeared on Dailymail.co.uk