UK officials trade blows over calls for strong pound policy

Further tightening of monetary policy will be needed, says BoE economist Huw Pill

Bank of England officials have made it clear that tackling inflation is their preeminent concern. AFP

Bank of England chief economist Huw Pill on Tuesday said policymakers would sacrifice growth in order to bring down inflation in the UK, saying there’s a risk of prices developing a “self-sustaining momentum".

Mr Pill said further tightening of monetary policy will be needed in the months ahead, and the BoE was ready to act “more aggressively”.

The remarks are an admission that tighter monetary policy may deliver a recession as policymakers struggle to contain the impact of a surge in energy and goods prices. But he declined to endorse the view of a colleague Catherine Mann who called for interest rate increases that would reverse a slide in sterling.

Mr Pill said the BoE’s tools are “blunt instruments” that can bring inflation back to target but can’t solve other problems, such as a growing divide between the rich and the poor and a weaker pound. “We don't have an exchange rate target," he said. "We don't have a target for real incomes. We have a target for inflation.”

Despite his pessimism, the hawkish outlook appeared to breathe some life into the UK's currency.

After a three-week losing streak versus the dollar, the pound rose 0.5 per cent to $1.2310, moving away from a March 2020 low of $1.1934 touched last week.

Against the euro, sterling edged 0.1 per cent lower at 85.92 pence, after touching a 13-month low of 87.21 pence versus the single currency last week.

Inflation over growth

Mr Pill was clear the BoE would prioritise curbing inflation above other economic factors. He said policymakers needed to lean against the second-round effects of inflation and they would allow growth to weaken if needed to hit their 2 per cent target.

His comments follow a fifth interest rate increase from the BoE last week and an official forecast that inflation will accelerate to more than 11 per cent this year. The bank opted for a quarter-point rise in the base rate to 1.25 per cent but warned they could move more forcefully at future decisions if required — a hint the next hike could be a half point basis points.

Jeremy Stretch, head of G10 FX strategy at CIBC, said all eyes this week would be on a set of economic data, including inflation on Wednesday, which could give investors clues on how forceful the central bank will be in an attempt to fight rising prices.

"A double-digit annual CPI gain is unlikely until July, (but) ongoing price pressures are set to underpin a summer of potential strikes and general malaise and discontent. This suggests maintaining a bias to sell into any risk-inspired sterling gains," he said.

Britain's biggest rail strike in 30 years kicked off on Tuesday as tens of thousands of staff walked out in a dispute over pay and jobs that could pave the way for widespread industrial action across the economy in coming months.

Also supporting sterling, London's FTSE 100 index climbed on Tuesday, as a rally in crude prices saw energy stocks surge.

"Equity are grinding higher helping those that are risk correlated such as sterling," Mr Stretch said.