UK inflation will soon fall to match rest of world, BOE official says
BANK of England (BOE) chief economist Huw Pill said UK inflation will soon fall in line with the lower rates seen in the rest of the world, reflecting a drop in energy bills.
Pill said there will be a “sharp further fall” in inflation rate to below 5 per cent in October that will help partially bridge the gap between price increases in the UK and the US and the eurozone.
The BOE kept interest rates unchanged at 5.25 per cent for a second straight meeting last week, but the UK still has the highest inflation among the Group of Seven economies. Pill expects the UK to appear like less of an international outlier when October’s inflation figures are revealed next week.
“We are a little bit slower,” Pill said at an online event on Monday (Nov 6) hosted by the BOE. “We have gone a little bit higher, or in some cases quite a lot higher than the US, but I don’t think that those forces are very persistent.”
“We’re going to see the UK get down to levels more comparable to what we’re seeing in the rest of the world.”
The BOE’s new forecasts released last week predicted that inflation will plunge to 4.8 per cent in October as household energy bills move down another step. It would mark a sharp deceleration from 6.7 per cent in September but would still be higher than the latest 3.7 per cent price increase seen in the US and 2.9 per cent rise in the eurozone.
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Pill said the way consumer energy bills are set by government regulations are partly to blame for keeping Britain’s inflation level above its peers.
“What we haven’t seen yet is gas prices have fallen quite dramatically over the last year, but because of this cap that Ofgem only moves (every) three months, the ability of that energy price floor to feed through into UK inflation, it tends to take a bit longer than it does in other countries,” he said.
Pill also said that interest rates will settle somewhere in the middle between the current “restrictive” level and the “too low” levels seen before the pandemic.
“Rates will hopefully come off their current levels as long as we return inflation to target, but equally we shouldn’t anticipate they’ll go back to zero on a very lasting way,” he said. “The situation that created rates at zero pre-Covid was an exceptional situation too, so they’re going to be somewhere in between.”
He became the latest BOE rate-setter to push back against speculation over interest rate cuts, reiterating that it is premature. He also emphasised that events that are impossible to predict could blow the BOE’s forecasts off track and require it to take some sort of action on rates that nobody can anticipate. BLOOMBERG
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