The Bank of England’s chief economist has said the government’s mini-budget, which led to the pound falling to a record low against the dollar, will require “a significant monetary policy response”.
Speaking at the International Monetary Policy Forum, Huw Pill reasserted the Bank of England’s willingness to act to rein in inflation.
“I think it’s hard not to draw the conclusion that all this will require a significant monetary policy response. Let me leave it there,” the member of the Monetary Policy Committee (MPC), which sets interest rates, said.
There will be “challenging times” to bring inflation back to the regulator’s 2% target, Mr Pill said. But he vowed to stick to that target: “Let me assure you, the MPC has a very good understanding of its mandate to maintain price stability and its remit to return inflation to the 2% target.”
Recent market conditions have created “additional challenges”, he added.
The government’s mini-budget last Friday will act as a stimulus to the economy, he said.
Mr Pill described Monday’s announcement from the Treasury, which committed to a further, costed fiscal announcement in November with the oversight of the Office of Budget Responsibility and a spring budget, as “helpful”.
The pound rose 0.85% to $1.07 in response to the announcement.
Mr Pill has been the Bank’s chief economist since last September and has consistently voted in line with Andrew Bailey, the governor, and the MPC as a whole on their interest rate decisions.
The Bank asserted yesterday that it is happy to push the brake on the economy by raising interest rates while the government presses the accelerator by cutting taxes.
The conflicting government and currency policies have attracted comment from the International Monetary Fund (IMF).
A spokesperson for the international financial institution said on Tuesday it is important that fiscal policy does not work at cross purposes to monetary policy.
The fiscal measures adopted, following the mini-budget, will likely increase inequality, the spokesperson said.
“Given elevated inflation pressures in many countries, including the UK, we do not recommend large and untargeted fiscal packages at this juncture,” they added.
Bank of England’s plain speaking will likely calm some of the volatility of the British economy
Central bankers are often accused of speaking in code or of making Delphic pronouncements.
But the words today from Huw Pill, the Bank’s chief economist, could not be more clear.
Mr Pill, who voted alongside Andrew Bailey, the governor, for a 50 basis point (half of one per cent) increase in Bank Rate last week, was asked at a panel discussion today about the government’s recent fiscal announcement and the market reaction that has followed it.
He responded that there had been a “change of pace” in UK fiscal policy and added: “It is hard not to draw the conclusion that all this will require significant monetary policy response”.
That was a fairly clear hint that the MPC will push through a big increase in Bank Rate when it next meets on 3 November.
Mr Pill, a likeable Welshman who attended the same Cardiff school as footballer Gareth Bale and rugby star Sam Warburton, was just as transparent in explaining why this would need to be the case, stressing that “the combination of fiscal announcements we’ve seen will act as a stimulus to demand”, although he did stress that these were his views only and not those of the other members of the MPC.
He also made clear that he did not favour an emergency move from the MPC prior to its next meeting on 3 November.
It is to be hoped Mr Pill’s plain speaking will calm some of the volatility that has been experienced in sterling and gilts since last Friday morning.
Nonetheless, though, his words should leave households, businesses and the markets in no doubt. The Monetary Policy Committee will be voting for a big increase in Bank Rate on 3 November – at least another 50 basis points and, more likely, 75 basis points.