Bank of England chief economist Huw Pill has said that interest rates are likely to rise further as the Bank can’t claim victory in its attempt to stop inflation becoming embedded in the economy.
“What we’re most concerned about is whether this self-sustaining inflation will persist,” Pill told a conference organised by Swiss bank UBS (UBS).
He added that interest rates are likely to rise further, in an attempt to prevent inflation leading to a spiral of higher wages and prices.
“We have done some, and I think there is still more to do,” Pill said. “At some point you have to think what level of rate is appropriate.”
“I think we cannot declare victory against second-round effects, but we are entering a recession. That’s a difficult trade-off environment for monetary policy,” Pill said.
That trade-off saw the Bank make its biggest interest rate rise in 30 years last week, lifting rates to 3%.
"We're not meant to be inflation nutters," Pill said at a conference organised by bank UBS. "We are meant to sort of manage this trade-off in a way that avoids unnecessary, counterproductive maybe, disruptions to the real economy."
The central bank last week raised interest rates by 75 basis points, its largest single hike since 1989, and warned of a prolonged recession while also looking to temper market expectations for further aggressive monetary policy tightening.
Deutsche Bank (DB) believes that a deep, long UK recession may have started. The investment bank's chief UK economist, Sanjay Raja, predicted UK GDP fell by 0.6% quarter-on-quarter in July to September, which could be the start of a deep and long recession.
“The drop in Q3 GDP reflects continued weakness in household and business confidence, higher inflation, and higher interest rates in the economy, with household consumption contracting in the quarter, business investment slowing, and government spending falling further,” Raja said.
“We also expect to see a material softening in inventories after two consecutive quarters of historically strong stockpiling, which should push GDP firmly into negative territory,” he added.