Bank of England’s Pill backs ‘steady handed approach’ to raising rates

By David Milliken

LONDON (Reuters) – Bank of England Chief Economist Huw Pill said he favoured a “steady handed approach” to further tightening of monetary policy by the British central bank, due in part to uncertainty about how high interest rates will need to rise.

Pill voted with the majority on the Monetary Policy Committee last week to raise interest rates by 25 basis points to 0.5%, but four of his colleagues voted for a bigger rise to 0.75% due to concerns about rising inflation expectations.

Pill said he understood their reasoning, and that his own decision about whether to raise rates by 25 or 50 basis points this month had been finely balanced, but he ultimately preferred less aggressive tactics.

“A case can be made for a measured rather than activist approach to policy decisions,” Pill said in a speech to Britain’s Society of Professional Economists on Wednesday. “That is what I would label a ‘steady handed’ approach.”

One reason for a step-by-step approach to tightening policy was uncertainty about the ‘neutral’ level of interest rates in Britain’s economy, at which they neither stimulated nor slowed growth. The BoE would need to look at the economic impact of its rate rises, he said.

The second reason was a desire to avoid markets expecting big swings in policy from the BoE and to draw a line under the type of drastic action taken to support the economy in March 2020 at the onset of the COVID-19 pandemic.

“I worry that taking unusually large policy steps may validate a market narrative that Bank policy is either foot-to-the-floor on the accelerator or foot-to-the-floor with the brake,” he said.

The BoE’s February rate rise was the first time it has raised borrowing costs at two successive meetings since 2004, and financial markets currently price in rates reaching 1.75% by the end of this year.

That is a higher interest rate than BoE forecasts last week showed would be needed to return inflation to its 2% target within the next two to tree years.

“More is to come in the coming months if the path sketched out in our February forecast plays out. But equally we have flagged that the outlook for Bank Rate beyond the coming months is uncertain, reflecting the two-sided risks to inflation at the policy-relevant two- to three-year horizon,” Pill said.

The BoE is also allowing its nearly 900 billion-pound stockpile of bonds to reduce in size in another move to reduce its stimulus for the economy.