Bank of England's Pill expects further interest rate rises
The Bank of England will probably need to raise interest rates in December and again in early 2027 to curb rising inflation, according to its chief economist, Huw Pill. Rates moved from 3.75% to 4% earlier this month.
Pill described that increase as a "significant step" but said "we have further to go". He told the Financial Times: "My view would be, we will see evidence that motivates further rises." He added that the Bank would "do what is necessary to get inflation back to 2% through time".
Inflation forecast to reach 5%
Inflation is expected to climb to 5% in spring next year, driven by high oil and gas prices linked to the Iran war. Pill called an end to the US-Israeli conflict with Iran, and a fall in energy prices, a "very low probability". He signalled he was ready to back another quarter-point rise next month.
He expects public and private sector workers to press for substantial pay rises, which could keep inflation elevated for longer. The Bank has not yet seen evidence of higher wages or of firms passing on higher costs to consumers, but Pill said the absence of evidence was not evidence of absence. He also said he believed the Bank had waited too long to act.
Pill suggested larger rises were possible, saying the "ability to be modest" in the scale of increases had diminished. Financial markets expect UK rates to approach 5% in 2027, which he called "not outrageous".
Strength of the economy disputed
Pill is among several policymakers who think the economy has strengthened over the past year, giving workers more bargaining power. Third-quarter growth was 0.7%, and the annual rate was beaten only by the US among G7 nations. City analysts see a December rise as almost inevitable.
Others disagree about how robust the economy is. Many are concerned that higher borrowing costs will hit manufacturing and construction, with the latter having contracted for much of the year.
Pressure on households
- An estimated 2.3 million homeowners will need to refinance their mortgages next year, facing higher payments.
- The energy price cap is expected to rise to almost £2,000 for a typical home.
- Council tax bills are forecast to increase by an average of almost 5%.
Households are expected to cut back spending in the new year as these pressures build.
Source: Guardian Business · Image: Pixabay