Bank of England official warns against more rate rises
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Top Bank of England official gives clearest signal yet that UK interest rates are at or near their peak
Signal: the Bank’s chief economist, Huw Pill
A top Bank of England official gave the clearest signal yet that UK interest rates are at or near their peak.
Just a day after interest rates were raised to a 14-year high of 4 percent, the bank’s chief economist Huw Pill warned against “doing too much” in terms of further steps.
The former Goldman Sachs economist, who sits on the interest-setting monetary policy committee (MPC), said the bank has already “done a lot” to curb skyrocketing inflation.
He added that the full effects of the rate hikes – from 0.1 percent in December 2021 to 4 percent now – have not yet been fully felt on the economy. “Interest rates have risen by almost 400 basis points in just over a year, and given the delays in the transmission of monetary policy, many of the effects of those rate hikes have yet to materialize.
“It is important that we guard against the possibility of doing too much,” he told Times Radio.
Pill said the bank needed to maintain a “Zen-like” balance in its goal of bringing inflation back to its target of 2 percent. Inflation is now at 10.5 percent, after peaking above 11 percent last year.
While the central bank expected inflation to reach its target by the middle of next year, Pill warned that it was necessary to ensure that companies did not get used to driving up prices, which could prolong the problem.
The Bank raised interest rates by half a percentage point to 4 percent for the tenth time in a row on Thursday, adding to the pressure on mortgage lenders and borrowers.
But it was more optimistic about the economic outlook, saying that while Britain was poised to enter a recession this year, it would be shorter and shallower than previously predicted.
The assessment provided some relief for UK analysts amid signs that the pain the UK economy was facing was not over.
Service companies had their worst performance in two years last month, data showed, as growth was held back by cuts in corporate and consumer spending. S&P Global said the industry’s activity index — with 50 being the boundary between growth and contraction — fell from 49.9 in December to 48.7 in January.
That was the lowest level since January 2021, when the country was under a strict Covid lockdown.
Tim Moore, economic director at S&P Global Market Intelligence, said the data showed the economy was “at risk of falling into recession” as it was hit by labor shortages, labor disputes and higher interest rates.
But there were some positive signs as the reading was less weak than previous estimates of 48. Corporate optimism also reached its highest level since April last year, when corporate leaders grew more hopeful that the worst was over.