Pill Says Higher Interest Rates Needed to Head Off Inflation Pressure

Bank of England Chief Economist Huw Pill has stated that raising interest rates now would help reduce the chance of having to be more aggressive in future to tame inflation. The increase in interest rates is aimed at preventing temporary departures from target inflation from becoming persistent. Pill made these comments ahead of his speech to the Edinburgh Chamber of Commerce, where he will also discuss the potential impact of the Iran war on long-term inflation pressures.

Pill and two other Monetary Policy Committee members voted for a rate hike in July, but were outvoted by colleagues who preferred no change. Investors have priced the chance of a quarter-point rate hike at little more than 15% for the next meeting, although this probability rose to over 70% for the subsequent meeting in November.

The Bank of England has been cautious about raising interest rates due to the uncertainty surrounding the Iran war and its potential impact on inflation. However, Pill's comments suggest that a prompt increase in interest rates may be necessary to head off potential 'catch up' nominal dynamics that could make temporary departures from target inflation more persistent.