Bank of England's Pill Sees Risk Of Persistent Inflation, Even If Gas Prices Fall  

 

• Bank of England Chief Economist Huw Pill said on Monday that Britain is at risk of persistent inflationary pressure from a tight labour market, even if natural gas prices stabilise or fall, implying further rate rises may be needed. Pill's speech - the first on monetary policy this year by a BoE official - comes as economists and markets speculate about how near the BoE is to the end of its rate-rising cycle.
• The BoE raised its main interest rate to 3.5% in December, up from 0.1% a year before, and financial markets expect the central bank to raise rates again to 4% at its next policy announcement on Feb. 2. Markets see BoE rates peaking at 4.5% in June, while economists polled by Reuters in December predicted a peak of 4.25% in the second quarter of 2023.
• Inflation has fallen slightly from a 41-year peak of 11.1% in October, and Britain's economy appears to be entering a shallow recession. Pill said Britain was "starting to see labour market indicators turn" as job vacancies fell from record levels and unemployment, which had been at its lowest since the 1970s, edged higher.
• The BoE also forecast headline inflation will fall this year as natural gas prices level off. Natural gas prices in Britain, which spiked in response to Russia's invasion of Ukraine last February, have retreated to around the same level as a year ago, but are several times higher than in early 2021.
• Pill said that even if natural gas prices eased further, that would not guarantee that underlying price pressures would fall enough for inflation to return to its 2% target.

(Source: Reuters