The Bank of England’s chief economist has admitted that the central bank’s decisions to prolong quantitative easing in the coronavirus pandemic may have contributed to the past year’s surge in inflation.
Giving evidence to the House of Lords’ economic affairs committee on Tuesday, Huw Pill said the UK’s double-digit inflation largely resulted from the increase in wholesale gas prices in Europe, although there was a risk of high inflation becoming more persistent.
But he added that decisions taken by the BoE before he joined its Monetary Policy Committee — including repeated rounds of quantitative easing over the course of the pandemic — could have worsened the central bank’s overshoot of its 2 per cent target.
The stock of assets held by the BoE — mostly government bonds — stood at £445bn at the start of the pandemic and had doubled to £895bn by the end of 2021 following three successive rounds of QE announced in 2020.
Global factors — including US fiscal support to households that boosted international goods prices — also played a part, Pill argued.
He said it was “an open question” whether some of those choices would have been made with hindsight, adding: “One could say the destruction of demand was overemphasised relative to the destruction of supply . . . That probably meant support for demand was stronger than it should have been.”
Pill’s comments, made in response to a question from the former BoE governor Mervyn King, are the first admission from an official at the central bank that its choices have contributed to the current squeeze on living standards.
Critics have accused the bank of fuelling inflation by pumping money into the economy and being too slow to raise interest rates in the first upswing after lockdowns were lifted.
But Pill pushed back against King’s suggestion that the BoE’s decision last week to raise interest rates by 0.75 percentage points to 3 per cent was still nowhere near sufficient to control inflation. Price rises reached 10.1 per cent in September, far above the bank’s 2 per cent target.
He said the BoE’s latest forecasts showed clearly that policymakers were likely to continue raising interest rates at future meetings, while also signalling that recent market expectations for the benchmark rate to reach 5.25 per cent next year had been overdone.
“I would say and my colleagues would say there is more to do . . . There is more to come,” he told the committee, reiterating the message he delivered on Tuesday morning at a conference held by the bank UBS.
At the conference, Pill did not say how much further interest rates had to rise but insisted another tightening of monetary policy would be needed to ensure that companies did not continue raising prices and that workers moderated wage demands. These are known as second-round effects in an inflationary period.
“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.
“What we’re most concerned about is whether this self-sustaining inflation will persist,” he added.
Pill moderated these hawkish remarks by noting that the BoE would still have to digest the effects of the chancellor’s Autumn Statement on November 17, which is likely to raise taxes and cut public spending.