The Vector

BoE economist questions markets’ path to four rate rises

Huw Pill says investors may be pricing a larger response to the energy shock than the evidence yet supports.

Bank of England chief economist Huw Pill has questioned whether the central bank will need to raise interest rates four times over the next year, as markets price a sustained response to higher energy costs. His comments highlight the uncertainty facing the Monetary Policy Committee ahead of its November meeting.

Pill said the market’s implied path was not necessarily the route the Bank would follow. Speaking at a Citi-organised event in Bangkok alongside the International Monetary Fund’s annual meetings, he asked whether four quarter-point increases were appropriate and said he was “a little bit more sceptical”.

The comments do not amount to guidance that rates will remain unchanged. Pill said the Bank needed to get into the right position and still had work to do. His argument was that a move of 100 basis points would require clearer evidence that the energy shock was creating persistent inflation beyond its initial effect on fuel and utility prices.

The market view has shifted sharply since the conflict in the Middle East pushed up oil and gas prices. Investors are pricing a rise at the Bank’s next meeting in November followed by further increases, according to Reuters. Market pricing reflects both expectations of higher rates and a risk premium demanded by investors during a period of geopolitical and economic uncertainty.

The Bank’s own September survey of 92 market participants was less aggressive. The median respondent expected Bank Rate to remain at 3.75% after the November meeting, with a median expectation of 3.75% one year later. The survey also found that respondents attributed much of the difference between market pricing and their own forecasts to upside risks and uncertainty premia.

The MPC has already been divided. At its September meeting, six members voted to keep Bank Rate at 3.75%, while Pill, Catherine Mann and Megan Greene voted for a quarter-point increase. The majority said higher borrowing costs and weaker labour-market conditions were already helping to restrain inflation, while the minority placed more weight on the danger that higher energy prices could feed into wages and wider prices.

The Bank said UK CPI inflation reached 3.1% in August, above its 2% target, and warned that the outlook would depend on how long the energy shock lasted and whether second-round effects emerged. For households and businesses, Pill’s remarks may temper expectations of a rapid sequence of increases, but they do not remove the possibility of higher borrowing costs if inflation becomes more persistent. The next scheduled MPC decision is on 5 November.

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