Bank of England needs to keep interest rates high, says chief economist

Bank of England
The Bank of England in the City of London. The Bank's chief economist, Huw Pill has indicated that further interest rate rises may be used to reach their target inflation rate of 2%. Inflation in the UK current'y stands at 6.8%. Credit: Anna Watson/Alamy Live News

The Bank of England's (BoE) chief economist Huw Pill has indicated that UK interest rate rises may need to be kept high to reach its 2% inflation target.

Speaking at a research conference in Cape Town, South Africa, he said rates need to remain “sufficiently high for sufficiently long” and warned that there was “no real room for complacency”.

He said he preferred a “Table Mountain” profile for UK rates, where they remained moderately elevated for some time rather than escalating rapidly and then dropping quickly.

Pill also pointed to multiple paths that the monetary policy committee (MPC) could take in order to get inflation back down from its current rate of 6.8%.

It comes as UK inflation reached a peak of over 11% in October last year, while core inflation, which does not track items susceptible to sharp rises and falls, such as food and energy, remains "stubbornly high" at 6.9%.

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"We on the MPC need to see the job through and ensure a lasting and sustainable return of inflation to the two per cent target,” Pill said.

"Crucially, I think in the UK, it’s more effective at ensuring that we see transmission through the two to five-year maturity rates that have become very central to the way the mortgage market and private borrowing operates,” he said.

The Bank of England has previously forecast that inflation will fall to around 4.9% in the last three months of the year.

Threadneedle Street has hiked UK interest rates 14 consecutive times to 5.25%. The MPC is set to meet again on 21 September, with markets betting on another 25 basis points rise.

Financial markets now expect interest rates to peak at 6.5% after recent data showed record wage growth, however, some predictions have since fallen to a pinnacle of 5.75% after a sharp decline in inflation.

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Pill's comments have also been echoed by other members. On Saturday, Ben Broadbent, BoE deputy governor for monetary policy, said that to bring down high inflation, “monetary policy may well have to remain in restrictive territory for some time yet”.

It also comes as data from the eurozone showed on Thursday showed that inflation was higher than expected in August at 5.3%, unchanged from July. Economists polled by Reuters had expected it to fall to 5.1%.

Watch: How does inflation affect interest rates?

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