We’re not ‘inflation nutters,’ top Bank of England economist says

LONDON — Bank of England policymakers are not “inflation nutters” but tightening of monetary policy is necessary to prevent surging prices becoming entrenched in the economy, the central bank’s Chief Economist Huw Pill said Tuesday.

The Bank’s Monetary Policy Committee raised interest rates by 75 basis points last week, its largest hike since 1989, despite warning that the British economy is facing its longest recession since records began.

“We’re not meant to be inflation nutters. We are meant to sort of manage this trade-off in a way that avoids unnecessary, counterproductive maybe, disruptions to the real economy,” Pill said at a conference organized by Swiss bank UBS.

Alongside its policy announcement last week, the Bank took the unusual step of challenging the market’s pricing for future interest rate hikes, suggesting the terminal rate will likely be below market expectations.

Pill said he was “skeptical” that front-loading rate hikes would help to temper expectations and produce an “immaculate disinflation” without any real cost to the economy. The Bank of England has come under criticism for being too slow off the mark in its efforts to rein in sky-high inflation.

“I think, unfortunately, it is the case that the Phillips curve has not disappeared. There’s a debate to be had about what the slope of the Phillips curve is and how that’s changing, but the Phillips curve has not disappeared, and the weakening of the economy is to some extent, a necessary part of the disinflation you need to see,” he said.

The Phillips curve is an economic model that argues that inflation and unemployment have an inverse correlation.

Pill also emphasized that the weakening of the U.K. economy thus far was not solely caused by monetary policy, with external factors such as surging energy prices and supply shocks eating into household income.

“I think there’s a danger, which we’re aware of, that we at the Bank of England and the MPC will be blamed for the recession. The recession was actually driven by other forces, and we’re trying to manage the adjustment to those other forces,” Pill said.

“One of the reasons for central banking independence is we don’t have to be popular, we can still take the right decision, and I think taking the right decisions is what our core ambition should be.”