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BOE Chief Economist Signals UK Inflationary Pressures May Be Easing - BLOOMBERG

JANUARY 09, 2023

(Bloomberg) -- Bank of England Chief Economist Huw Pill signaled UK inflationary pressures may be easing as the labor market weakens and the economy heads into recession. 

“We are starting to see labor market indicators turn,” Pill said in the text of a speech to be delivered in New York this evening.

The remarks reflect a shift in tone from Pill, who previously has emphasized the central bank’s determination to act forcefully against inflation that reached a four-decade high last year. While he stressed the bank won’t hesitate to bring prices back to the 2% target, he also pointed out reasons why the outlook is improving.

“Should economic slack emerge and unemployment rise as the latest MPC forecasts imply, that will weigh against domestic inflationary pressure and ease the threat of inflation persistence,” Pill said.

Pill said policymakers should not be distracted by short term fluctuations in inflation but focus on the longer-term dynamics. Those include wage setting and corporate pricing behaviour as “key indicators of inflation persistence.” Persistently high natural gas prices could also influence inflation expectations.

But he warned market participants that there is “no single smoking gun that could be identified as the key indicator or driver of inflation persistence and thus monetary policy decisions.”

Investors have reined in bets for another sharp increase in interest rates when the BOE’s Monetary Policy Committee next votes on rates in February. Money markets indicate a half-point increase to 4% — certain just a few weeks ago — now is only partly priced in.

“What the bank can do – and indeed must do, if it is to achieve its price stability mandate – is ensure that any self-sustaining momentum in inflation at rates above the 2% target is squeezed out of the system by constraining demand relative to supply as necessary,” Pill said.

He also noted that due to the dynamics of the UK economy at the moment, some pressures on prices may prove more persistent.

“The context that prevails in the UK – of higher natural gas prices with a tight labor market, adverse labor supply developments and goods market bottlenecks – creates the potential for inflation to prove more persistent,” Pill said.

“The threat of second round effects that sustain inflation at above target rates may well remain, as domestic firms and households try to resist the squeeze on their real incomes and spending power.”



--With assistance from Andrew Atkinson.

(Updates with comments from the speech from third paragraph.)


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