LONDON, May 14 (Reuters) – Bank of England Chief Economist Huw Pill said on Thursday a “prompt but modest” increase in interest rates would help to head off the risk of inflation pressure caused by the Iran war becoming stuck in the British economy.
Pill, who cast the lone vote for an increase in borrowing costs at the BoE’s rate-setting meeting in April, said policymakers needed to think about whether rates should go up sooner rather than later.
“If you wait until the market is forcing you to move, I think that may involve more challenges for the central bank than if you act a little more actively,” he said at an event hosted by NatWest.
By taking “prompt but modest” action, the BoE would be able to influence the response of businesses and workers to the rise in headline inflation, Pill said.
Earlier on Thursday, BoE Deputy Governor Sarah Breeden was quoted as saying by the Financial Times that interest rates did not need to rise in June or July. BoE Governor Andrew Bailey has also said he wants more time to assess the situation.
Pill said the risk of so-called second-round effects – such as firms putting up their prices or workers demanding higher pay in response to an energy-driven rise in inflation – was likely to be weaker than after Russia’s full-scale invasion of Ukraine in 2022, given the current weakness in the labour market.
However, he also said it was not clear the labour market was as loose as when there were oil price spikes in 2008 and 2011, which did not lead to second-round effects on inflation.
As well as worries about inflation caused by the Iran war, political pressure on Prime Minister Keir Starmer has pushed long-term British government borrowing costs to their highest levels in nearly three decades in recent days.
Asked about the rise in those borrowing costs, Pill said the BoE might want to offset some of the pressure on the economy but not if the increase in market rates was driven by inflation concerns.
(Reporting by David MillikenEditing by William Schomberg and Paul Simao)
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