Interest rates to keep rising warns Bank

Chief economist sounds fresh alarm over threat of inflation

The Bank of england raised interest rates to protect its credibility as inflation soars, a senior official has said.

Speaking a day after the first rate hike since the pandemic struck – and only the third since 2007 – the central bank’s chief economist huw Pill said there was no choice but to act.

And with inflation heading well above the 2pc target towards a 30-year high of 6pc, the former Goldman Sachs banker warned further increases in interest rates would be needed.

Asked on CNBC television whether there would be ‘a lot more rate hikes to come’ if inflation remained elevated, Pill said: ‘I think that’s true.’

he said there were signs that inflation was ‘going to prove more persistent’ than previously thought.

‘To ensure the credibility of our inflation target of 2pc we felt the time had come to act to take away some of the emergency support for the economy that was introduced 18 months ago,’ he said.

With the Omicron variant now denting the economic recovery, Pill added: ‘We need to move forward now cautiously.’

he said there was little the Bank could do to help families facing higher energy bills as tensions between Russia and Ukraine drive up natural gas prices.

‘That’s something which is very uncomfortable for us because it’s keeping inflation above target, well above target and unacceptably above target for a longer time,’ Pill (pictured right) said.

But the central bank would seek to limit domestically generated pressures such as rising wages in a tight jobs market.

‘Those are things that are likely to require a monetary policy response here in the UK in order to ensure that they are contained,’ he said.

Rates remain low by historic standards despite this week’s hike. In the decade before the financial crisis of 2007-09 they averaged 5pc.

economists now expect a series of rate rises next year as the Bank battles to get inflation back under control having seen it spiral above the 2pc target in the wake of the pandemic.

‘I don’t think this is a case of one and done,’ said Ruth Gregory,

senior UK economist at Capital economics, as she forecast rates hitting 0.75pc in 2022.

George Buckley at Nomura predicted rates would be 1pc by the end of next year.

‘I think that as soon as you get into the spring, and hopefully Omicron is on the retreat, that’s the point at which the bank will consider increasing interest rates in a more serious way,’ he said.

The Bank slashed rates to an all-time low of 0.1pc after Covid struck in a desperate bid to support the economy.

Its move this week made it the first major central bank in the world to raise rates since the start of the pandemic, though the US Federal Reserve has signalled plans to follow suit next year.

And both the Fed and european Central Bank have also announced the scaling back of their moneyprinting programmes.

The decision by the Bank to raise rates was not unanimous, however, as members of the ninestrong monetary policy committee (MPC) weighed up the threat of rising inflation against signs the economy was slowing in the face of the Omicron variant.

Silvana Tenreyro was the only member of the rate-setting MPC to vote against the plan to raise interest rates.