October 4, 2022
Bank of England says interest rate likely to rise despite energy bill freeze

The Bank of England’s chief economist said on Wednesday that Liz Truss’s plan to freeze energy bills for homes and businesses is likely to force the central bank to raise interest rates in the coming months, despite lowering inflation rates. Is.

Asked specifically by lawmakers on the House of Commons Treasury Select Committee about whether the package would mean a higher interest rate, Hu Pill said: “In response to the question, will fiscal policies generate inflation – we are here to ensure that.” To ensure that they do not generate inflation . . . our aim is to bring inflation back on target.”

“We have work to do,” he said.

Pill’s comments, who was present along with Governor Andrew Bailey and two other monetary policy committee members, came after MPs were repeatedly asked to comment on the UK’s new prime minister’s expected £150bn-plus rescue package , which will be borrowed by the government. ,

Bailey declined to comment specifically on the expected bailout, explaining that the government has yet to announce measures, which Truss confirmed will outline on Thursday. But he added: “The actions we have to take to achieve the inflation target are hard for us to do, however they may be in terms of consequences,” explaining that the bank’s focus is to bring inflation back to its 2 percent target. was about to bring. ,

Pill told the committee that the energy crisis was affecting homes badly. “Higher gas prices have an income implication for the UK,” it said, adding that if the pain is absorbed by increased public borrowing it would have two effects on inflation.

He added that in the coming months, the impact of freezing energy bills will likely prevent inflation this autumn from rising above the level of 10.1 per cent in July. “This will drive headline inflation lower than forecast in our August report.”

But he added that interest rates do not depend on price volatility in the coming weeks. “This very short-term impact on inflation may not be the most important thing from a monetary policy point of view. From a monetary policy point of view this is the implication of the package of measures . . for inflation in the long term,” Pill said.

He said the likely result of freezing energy bills and cutting taxes would be to increase spending in the economy and would “probably lead to slightly stronger inflation”.

Line chart (year-over-year, %) with CPI inflation forecast showing freezing energy bills lowers the peak of consumer inflation but raises it later

Asked whether the slowdown was necessary, all four BoE officials blamed Russian President Vladimir Putin’s invasion of Ukraine and his decision to cut gas supplies to Western Europe, which they are targeting in Britain this winter. were expecting.

Bailey, however, acknowledged that the MPC did not try to offset the slowdown by lowering interest rates in August because its job was to worry about prices.

There were some differences among BoE officials as to how fast interest rates needed to rise to address the inflation threat. Kathryn Mann, one of the MPC’s outside members, said the faster rate hike would help dampen inflation expectations, which she said had already risen too much.

Another external MPC member, Silvana Tenrero, however, said that even if the BoE had kept interest rates at 1.25 per cent in August rather than at 1.75 per cent, it was likely to be enough to bring inflation back to target in the medium term. Condition.

She has been in the minority of one on the committee to caution and said raising interest rates was best done “gradually when there is a lot of uncertainty”.

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