BoE's Pill: Provided jobs market remains strong, rates will need to gradually rise

Bank of England Chief Economist Huw Pill said on Friday that provided the jobs market continues to be strong, interest rates will need to gradually increase in the coming months, according to Reuters. The economic picture is still uncertain, he added, saying that the BoE can’t give precise guarantees on what will happen to interest rates. Moreover, the BoE should take a cautious approach to policy, assessing each decision on a step-by-step basis, he noted, adding that, in his opinion, the burden of proof has now clearly shifted onto the rates decision. 

In September, Pill said, I was seeking data to confirm my assessment of the strength of the post-pandemic recovery and accumulation of inflationary pressures. Now, he added, I scan incoming information for challenges to that view.

If the data evolves unfavourably and inflation is forecast to fall below target at the policy-relevant horizon, he said, the BoE can remain on hold, or even reverse course. However, he caveated, if the data strengthens and inflation is forecast to remain persistently above target, we can continue to raise rates. I do not see an immediate threat of UK inflation de-anchoring from its 2% target at the policy-relevant medium-term horizon, Pill noted. 

In my view, Pill continued, the ground has now been prepared for policy action and given that the incoming data supports the conclusion that the recovery is continuing. However, the Monetary Policy Committee’s steer remains a conditional statement. 

Market Reaction

Pill's comments suggest he supports a BoE rate hike next month. Though market participants already suspected that he supported this, they will now be more confident. Thus, his remarks might lend gentle support to the pound. But the overarching market focus of the day remains on the newly discovered and highly concerning new Covid-19 variant in South Africa.