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The Bank of England will “deliver inflation back to its 2% target”, its chief economist has pledged, despite the challenges it faces from rising food and energy costs and a fall in the value of the pound that has made both more expensive.
Huw Pill said he wanted to make plain to the public that the central bank’s single purpose at the moment was to bring down the rate of price growth, in a clear hint that more interest rate rises are on the way.
His comments follow an equally stark warning from Sir Jon Cunliffe, a deputy governor of the Bank, who said its monetary policy committee (MPC) would “do whatever is necessary” to prevent the rocketing cost of living from becoming a lasting inflation problem.
Pill said he was watching companies to see how much they were passing on wage rises and higher raw materials and component costs to consumers, pushing up prices further.
Britain’s main inflation rate rose to a 40-year high of 9.1% in May but the Bank expects it to climb further, reaching 11% in the autumn.
The Bank’s target rate for inflation is 2%, and in response to soaring prices it has raised interest rates five times since December.
Pill said: “I see my role as an MPC member as being ‘in the price stability business’. That means returning inflation to the 2% target in sustainable way. If there is one message that a wider public audience takes away from my remarks this morning, I hope it is that.”
Cunliffe insisted the central bank would act “forcefully” to ensure that higher inflation resulting from domestic pressures and soaring prices of imported energy and food do not become “the new normal” for the British economy.
“It’s our job to make sure that as this inflationary shock passes through the economy we don’t find that leaves us with inflation being the new normal, the sort of embedded psychology,” he told BBC Radio 4’s Today programme.
He added that the Bank’s rate-setting MPC would take steps to tackle rising inflation. “People can have confidence that we will act to make sure that that doesn’t happen,” he said.
Cunliffe argued that British households would be able to cope with interest rates as high as 5% without defaulting on their debts.
He made the claim as the Bank released its latest financial stability report, which said that most UK consumers and businesses entered the current financial crisis with relatively low debt levels, although it expects them to become more stretched over the coming months as weaker growth and higher prices bite.
In his BBC interview, the bank deputy governor said rising inflation was already changing consumer behaviour. Cunliffe added that a slowdown in spending was already having an impact on the wider economy.
“What we expect is that the cost of living squeeze will actually hit people’s spending and that will start to cool the economy, and we can see signs that the economy is already slowing,” he said.
The Bank has faced criticism for being too slow to start increasing rates when prices first began to rise.
“We’ve increased rates at every meeting for the last five meetings. I don’t think that has ever happened actually before in the history of the MPC,” Cunliffe said.
The Bank increased its key base rate by 0.25 percentage points to 1.25% in mid-June, and some economists have forecast that the central bank could raise rates to as high as 3% by the end of 2023
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