BOE chief economist Pill hints traders’ expectations of rate hikes are wrong

Bank of England chief economist warns of 'tough trade-off' for 2% inflation

LONDON (Reuters) – The Bank of England remains committed to its “primary goal” of curbing inflation, but hopes markets will “re-anchor their interest rate expectations,” chief economist Huw Pill told CNBC on Friday.

The central bank raised interest rates by 75 basis points on Thursday, the largest hike since 1989, and warned of a protracted recession, while also trying to temper market expectations for further aggressive monetary policy tightening.

The Bank of England has an inflation target of 2%, but price increases reached a 40-year high of 10.1% in September and are expected to peak in the fourth quarter.

“We both have to educate” [the] bank interest, but also to take actions to reduce QE [quantitative easing] portfolio, to tighten policies to achieve our goal,” said Pill.

And the fact that there have been disruptions in the markets, which have had their own needs to be addressed, hasn’t deterred us or distracted us from this key medium-term goal of what the Monetary Policy Committee is trying to do. “

BOE's Bailey: UK economic shocks differ from US ones

Pill suggested that recent volatility in the UK economy, such as the panic in bond and currency markets with which former Prime Minister Liz Truss greeted fiscal policy announcements at the end of September, had distorted market expectations for the Bank’s future rate hike trajectory.

“We don’t think interest rates need to rise as high as the market has priced in precisely because that would cause a slowdown in the economy that is greater than necessary to control these inflationary dynamics,” Pill added.

The Bank expects an economic recession that started in the second half of 2022 to last until mid-2024, which would be the longest period of GDP contraction since records began.

“What we’re trying to do, we’re always trying to do this, is to find that balance that will bring us back to our inflation target of 2% without causing unnecessary and expensive problems in the real side of the economy,” Pill said.

“And so creating that balance, signaling that balance, that was really our main message yesterday.”

The Bank issued unusually direct guidance to markets on Thursday, and Pill said the period of political and economic turmoil in recent months meant the Monetary Policy Committee was trying to “re-anchor”. [its] own thinking in the more fundamental drivers” of inflation.

“I think we’re trying to re-anchor our communication around a forecast that emphasizes those more fundamental drivers,” he said.

“And I think we hope, we plan that gives markets an opportunity to re-anchor their thinking, and ultimately their pricing, in that kind of world that looks through and beyond the disruptions that we’ve seen over the past few months.”

The Bank was forced to intervene in the UK government bond market in September with a two-week contingency gold purchase program after the market’s response to Truss’ tax cuts pushed “mini-budget” pension funds to the brink of collapse and pound to an all-time low.

Markets have stabilized somewhat since former finance minister Rishi Sunak took office as prime minister. His return to more conservative fiscal policies has in turn eased pressure on the Bank to be even more aggressive against inflation.

Watch CNBC's full interview with Bank of England's Andrew Bailey

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