An external member of the Bank of England’s (BoE) Monetary Policy Committee has said UK interest rates will have to rise if the labour market stays tight.
Speaking at the Adam Smith Business School at the University of Glasgow, Jonathan Haskel, who is also a professor of economics at Imperial College Business School, said although much of the current inflation is due to outside forces such as energy prices, “the labour market is tight and we have to be vigilant”.
“We should maintain a long term perspective. The pandemic was the worst shock to hit the UK economy in 100 years,” he said, in what was his first in person speech since the start of the pandemic.
“In my view the prospective rise in bank rate from its emergency level — when that comes — is not a bug, but a feature. It reflects the success of the policies, mostly fiscal, health and science that have supported the economy over the pandemic.”
At the start of November the MPC kept UK interest rates at its current historic low of 0.1%, voting by a majority of 7-2 to maintain the Bank rate as it is, despite widespread anticipation it would increase the rate to 0.25%.
The UK's main interest rate has been at an all-time low of 0.1% since the pandemic began, having been set at 0.75% pre-pandemic. A rise to 0.25% would have been the second lowest rate the bank has ever set.
Analysts have said that they expect the rate to be hiked to pre-pandemic levels in the next 18 months as the economy resumes a more steady course.
Haskel was one of the seven MPC members that voted to hold rates at 0.1% to wait and see how the jobs market and economy fared.
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The British economist added in his speech that rising inflation will be transitory “as it has been in the past”. He pointed to the inflation problems of the 1970s, which were in part due to changes in commodity prices, and the long drawn-out response of wages to such changes.
Inflation, as measured by the annual rise in the consumer price index (CPI), was 4.2% in October. The BoE’s latest forecast projects inflation to peak at around 5% in the second quarter of 2022, more than double its target of 2%.
“Around 62% of inflation deviations from target is due to outside forces that are difficult for a central bank to control in the short run: echoing what the governor has said, central banks cannot grow more food, supply more gas or make the wind blow stronger,” Haskel said.
He added that the central bank could try raising interest rates sharply, for example in response to a significant increase in oil prices, which may provide a "modest cushion" against a hike in the inflation rate through a stronger pound.
“But any real reduction in UK activity stemming from the rise in interest rates will have little to no impact on the fundamental global supply imbalance underlying the energy price change," he said.
His speech follows comments from BoE governor Andrew Bailey earlier this month who admitted that he was “very uneasy about the [inflation] situation”.
He said that growth in the British economy is starting to “flatten out”, meaning that Britain was facing more “two-sided risks” than before.
He pointed to weaker growth on one side, and rising inflation on the other, in the midst of an ongoing supply chain and energy crisis that is dampening recovery and pushing inflation even higher.
“I am very uneasy about the inflation situation… I want to be very clear on that.” Bailey said. “It is not, of course, where we want it to be, to have inflation above target.”
Experts now expect interest rates to rise at the next MPC meeting on 16 December.