Raising rates to shield pound is ‘distraction’, says Bank economist

‘Monetary policy is not the panacea, it doesn’t allow you to achieve lots of different things in the short term’

THE Bank of England’s chief economist has warned that raising rates to prop up the pound would be a “distraction” amid a widening split at the heart of Threadneedle Street.

Huw Pill, who also sits on the ratesetting Monetary Policy Committee, said the Bank risked being distracted by thinking it could fine-tune the economy through rates.

His comments came after fellow MPC member Catherine Mann on Monday publicly argued that rapidly boosting the returns on sterling deposits by raising rates could support the pound and help tame inflation.

Sterling has fallen almost 10pc this year, leaving it as one of the worstperforming major currencies and making imports more expensive.

Mr Pill said: “I worry that thinking we can use that very blunt tool to do many things – stabilise the exchange rate in the short term, and ensure that any weakness in output is going to be weighed against and so forth and so on.

“That can distract us from the task we’ve been given to do, and end up meaning that we are much less effective in achieving that task.

“Monetary policy is not the panacea, monetary policy is not an instrument that allows you to achieve lots and lots of different things at short term – stabilise the exchange rate, fine-tune developments in employment or activity.”

Ms Mann was one of three defeated “hawks” in the MPC who voted to increase the Bank Rate half a percentage point to 1.5pc at last week’s meeting.

Mr Pill was one of the victorious doves who backed a 0.25 percentage point rise, but has said he would support faster rises if there were signs of sustained inflationary pressures through wage increases or firms pushing up prices.

Ms Mann on Monday suggested Threadneedle Street should focus on targeting short-term inflation by raising rates to strengthen the pound, which would make imports cheaper. Mr Pill, formerly of Goldman Sachs, said yesterday that the Bank needed to be aware of “developments in the exchange rate”, but added: “We don’t have an exchange rate target. We don’t have a target for real incomes. We have a target for inflation.”

Figures published yesterday showed that pay awards are the highest in three decades, suggesting deeper pressures may be building behind a surge in inflation driven by import costs.

The median basic pay rise in the three months to April was 4pc, the highest since 1992, according to Xperthr analysis of 295 settlements covering 928,000 employees.

Meanwhile, there are early signs that the economic hit caused by spiralling prices could be slowing demand so much that inflationary pressures are starting to ease. Manufacturers reported growth had eased a touch in the three months to June and expect it to slow further in the coming quarter, according to the CBI’S monthly survey.

The net balance of firms expecting further price rises dropped sharply from 75pc to 58pc.