The new chief economist at the Bank of England has said the ground has been prepared for a rise in interest rates, but stopped short of outlining a timetable for the rate change.
In his first speech as chief economist, Huw Pill told the Confederation of British Industry on Friday (November 26) the burden of proof to raise rates has “clearly shifted”.
“The ground has now been prepared for policy action,” he said, adding the “bank rate scenario” in the MPC’s monetary policy report earlier this month showed if rates were left unchanged, inflation would remain above the 2 per cent target.
The rate of inflation has sat above the target since May this year, and hit its highest level since December 2011 in October, when it rose 4.2 per cent.
“If we ‘do nothing’ with [the] bank rate, inflation will end up ‘too high’ relative to our target,” Pill said.
“That is why the MPC collectively felt able on this occasion to offer a steer about policy prospects in the coming months, something it has generally refrained from doing.”
Pill highlighted the lag in policy transmission, which he said could range from 12 to 24 months, meant that tightening monetary policy now would prove “largely futile” in containing the projected 5 per cent rise in inflation foreseen for next spring.
He said if the supply-side pressures causing inflation did prove to be temporary, inflation may return back to target.
However, he added his views on the bank rate and asset purchasing programme had changed since he joined the MPC three months ago.
“Even though I believed longer-term inflation expectations remained anchored at levels consistent with the MPC’s 2 per cent target, neither the historically low level of bank rate nor the historically high size of the Bank of England’s balance sheet seemed sustainable in the face of emerging two-sided risks to the economic outlook.”
The market had expected rates to rise at the beginning of November when the Bank maintained its base rate at 0.1 per cent.
But the Omicron variant has punctured expectations of a Christmas rate hike, according to Laith Khalaf, head of investment analysis at AJ Bell.
He said: “Markets had really got ahead of themselves in so confidently predicting a 2021 rate rise, no doubt egged on by some hawkish rhetoric from the Governor of the Bank of England.
"But it was always going to be risky for the Bank to raise rates this year, with the heightened chance of a resurgence in the pandemic over the winter months, and employment data beyond the furlough scheme only just becoming available.
"The emergence of the Omicron variant has now crystallised fears that we’re not out of the woods just yet as far as the pandemic is concerned, and led to a shift in monetary policy expectations."
Financial markets had begun to price in a rise in interest rates in the autumn as governor Andrew Bailey began hinting at impending rate rises.