At an online conference yesterday (February 9), Huw Pill said policymakers need to manage “a trade-off” between the impact of the underlying shock on inflation and the impact of any “policy mis-calibration” on inflation.
“Managing this trade-off implies a less aggressive response to any specific shock than would be desired if there were no uncertainty about the parameters of the economy, and thus no scope for policy mis-calibration,” he said.
The central bank raised the base rate to 0.5 per cent earlier this month, after an initial rise from 0.1 to 0.25 per cent in December.
The decision was tight, with four members of the Monetary Policy Committee voting for an even higher rise to 0.75 per cent, which many have said could point to another rate hike near on the horizon.
But Pill said he intended to focus on more persistent developments in the data that have lasting implications on the outlook for price stability, calling this a steady handed approach to monetary policy.
One data point Pill highlighted was that wage growth could reach 5 per cent this year. Come 2023, the chief economist predicts that growth will slow, allowing inflation to ease naturally without the UK facing a severe financial shock.
Pill admitted the UK labour market was “tighter” than the central bank had anticipated, and that the slow in wage growth was likely to happen due to the impact of higher energy prices.
He said the cost of energy and international goods has “repeatedly surprised” in both magnitude and persistence over the past year, putting “painful pressure” on the cost of living and placing the Monetary Policy Committee in the current “very uncomfortable position” of forecasting headline inflation to peak at over 7 per cent in April.
Inflation has risen above the Bank of England's 2 per cent target each month since May last year. In December it rose by 5.4 per cent, the highest level of increase since March 1992.
A large portion of this was down to energy prices, which have soared in recent months, and could jump again in April when the energy cap is lifted.
Other factors pushing the rate of prices up include disruption to global supply chains due to the pandemic, as well as low levels of unemployment.