Bank ‘underestimating inflation and tightness of labour market’

THE Bank of England is underestimating inflation and failing to act aggressively enough to bring down prices, according to Credit Suisse.

Analysts at the Swiss bank said Threadneedle Street was “underestimating the persistence and strength of domestic inflation and the tightness of the labour market”.

They warned that inflation will last longer than the Bank expects and that its dovish approach to raising interest rates will mean that prices are higher for longer and the pound is weaker.

Credit Suisse maintained its prediction that rates will peak at 4.5pc but said the Bank will take longer to get there, with rate rises continuing until May 2023, compared to March 2023 previously.

It said this week’s 0.75 percentage point rise in rates – the biggest in three decades – was likely to be a one-off, with a smaller 0.5 percentage point increase on the cards for the next meeting in December.

The note added that expected fiscal tightening in Chancellor Jeremy Hunt’s Autumn Statement on Nov 17 will be a significant factor in the outlook for interest rates. The Bank’s Monetary Policy Committee on Thursday raised interest rates by 0.75 percentage points to 3pc – the biggest jump since Black Wednesday in 1992.

However, Governor Andrew Bailey sought to rein in bets on further aggressive rate rises, saying market expectations of a peak of 5.25pc were too high.

Yesterday the Bank’s chief economist said interest rates were likely to rise above 3pc in the coming months, but reiterated comments that market bets were overdone.

Huw Pill said: “We’re trying to signal that rates are unlikely to get that high, at least on the basis of information we have today.

“But none the less, there is still more to come over coming months because unchanged, interest rates at the 3pc level are insufficient for us with our objective.”

Mr Pill said market pricing may suggest that investors think interest rates need to be much higher to tame inflation, which has surged to a 40-year high of 10.1pc – five times the Bank’s target.

But he said: “We think market prices have gone too far. We think that raising rates but not as far as markets expect will induce a sufficient slowing of the economy.”