Bank of England warns UK inflation could pass 5%

Bank of England chief economist says above-target inflation will be transitory

The Bank of England’s new chief economist has warned inflation in the United Kingdom could rise above 5% by early 2022. 

Huw Pill told the FInancial Times that he would not be shocked “if we see an inflation print close to or above 5%”, admitting “that’s a very uncomfortable place for a central bank with an inflation target of 2% to be”.

Pill, who previously worked at Harvard, the European Central Bank and as chief European economist at Goldman Sachs, took over as the BoE’s chief economist from Andy Haldane in September. 

‘Transitory inflation’

Shortly before departing, Haldane voiced his concern that the bank’s Monetary Policy Committee (MPC) could be proved wrong in its assertion that inflation above its 2% target was a “transitory” phenomenon. 

In a speech to the Institute of Government in July, he warned: “By the end of this year, I expect UK inflation to be nearer 4% than 3%.”

Although he has continued to stress the “transient” nature of ongoing price increases, Bank of England Governor Andrew Bailey has admitted inflation could well reach 4% by the end of 2021. 

In a recent interview, Bailey said: “This has been an almost unprecedented set of events. They are not over yet, that we are learning. We have to manage our way through them, and we will do that.”

Interest-rate hike

Huw Pill echoed this outlook in his latest interview, arguing that “we don’t need the emergency settings of policy that we saw after the intensification of the pandemic... given the transitory nature of what we’re seeing in inflation”.

Pill, like Bailey, added that the question to raise interest rates from the current ultra-low level of 0.1% would be a “live” one when the MPC meets in early November. 

On Wednesday, the Office for National Statistics (ONS) reported a surprise fall in inflation. The Consumer Prices Index (CPI) rose by 3.1% in September, instead of the 3.2% increase seen in August.

Further reading: FTSE falls as Bank of England signals interest rate hike

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