The Bank of England’s chief economist has admitted that the central bank faces its toughest challenge since independence in 1997 and signalled that interest rates need to rise further. Speaking in Cardiff, Huw Pill said that inflation’s surge to a 40-year high of 9% in April put him in a “very uncomfortable situation”, given the Bank is meant to keep inflation around 2%. But Pill says this discomfort is ‘as nothing’ compared to the challenges facing poorer families who are most hit by the current cost of living crisis. That’s why the Monetary Policy Committee voted to raise interest rates to 1% this month and Pill gives a clear sign that interest rates will need to rise further, as the Bank walks a ‘narrow path’. Underlying wage growth is currently strong, he says, but rising inflation will hit disposable incomes, slowing the economy. Pill said the Bank must avoid “self-sustaining, expectationally-driven” price rises -taking hold (where current high inflation drives up expectations for wages and prices). He concluded by saying inflation is now the biggest challenge since the Bank of England was given responsibility for setting interest rates, 25 years ago this month.

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