Pill: BoE won't repeat 2022 tightening; growth risks may keep rates steady

• Scant evidence of second-round effects remains, according to Pill.
• The recent rate rise was a precautionary step to contain inflation.
• Activity and employment continue to marginally add to demand.
• Energy costs are generating pipeline inflationary pressure.
• The BoE will not replicate the 2022 rate-hiking cycle.
• No course is set for interest rates next year; the outlook becomes more uncertain from spring.
• If growth stalls next year, the bank rate could be left unchanged or even cut.
• The key factor will be the squeeze on corporate margins and how firms respond.
• The Bank is focusing on wage bargaining, costs, and pricing.

Bank of England Chief Economist Huw Pill reiterated that there is still little proof of second-round effects from higher energy prices. He stressed that the most recent rate increase was a preemptive move, aimed at preventing inflation from becoming more persistent.

Pill acknowledged that the Monetary Policy Committee holds differing views. Although employment and activity still add to demand at the margin, rising energy costs are creating pipeline inflation that the Bank must monitor.

He emphasised that the BoE does not plan to repeat the aggressive rate hikes of 2022. He also pushed back against assumptions of a fixed policy path, stating that nothing is locked in for rates next year and that the outlook will likely become more uncertain from spring. Importantly, Pill said that if economic growth stalls next year, the bank rate could remain on hold or even fall. This is a relatively dovish statement from a typically hawkish official.

Pill stressed that the BoE aims to contain the risk of energy-driven inflation becoming entrenched without committing to an extended tightening cycle. Any further rate rises will depend heavily on whether inflationary pressures broaden and whether the economy can withstand the squeeze on businesses and households.

Financial markets currently see a 50% chance of a December rate hike and expect 68 basis points of total tightening by end-2027. Much will depend on US-Iran developments and incoming economic data.