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The Bank of England’s new chief economist said a decision whether to raise interest rates next month is live and “finely balanced,” but signaled that any future tightening doesn’t need to be overly restrictive.

Huw Pill told the Financial Times that U.K. inflation may exceed 5% in coming months, putting the BOE, which targets a rate of 2%, in an uncomfortable position. He said that the pace of price gains would moderate in the second half of 2022. 

The remarks suggest that the case for a rate increase next month -- widely anticipated by financial markets -- isn’t a done deal, but that Pill may favor acting to curb inflation. His comments may also rein in investors’ bets that the BOE is about to embark one of its most aggressive rate-hike cycles this century. 

“The big picture is, I think, there are reasons that we don’t need the emergency settings of policy that we saw after the intensification of the pandemic,” he said, according to the FT. 

After Governor Andrew Bailey warned on Sunday that the central bank will “have to act” on inflation, money markets are wagering that the central bank would increase borrowing costs to almost 1.25% by the end of 2022 from 0.1% now.

“We do not see, given the transitory nature of what we’re seeing in inflation in our base case, a need to go to a restrictive stance,” Pill said.

While Pill is understood to be one of the more hawkish-leaning members of the nine-strong Monetary Policy Committee, the FT said he warned investors not to get too caught up on the timing of the BOE’s moves. 

“Maybe there’s a bit too much excitement in the focus on rates right now,” he said.

Pill also said:

  • The U.K. labor market is “quite tight” but not showing signs of wage rises that cause a second round of inflationary pressure
  • There was likely to be “more controversy and more potential for disagreement” among MPC members in the future
  • The future for bond purchases, or sales, should be “gradual and predictable,” even if that means raising rates while purchases are still being completed. 

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