MNI INTERVIEW: No Swift Fall From UK Rate Peak-NIESR's Millard

The Bank of England may have to raise Bank Rate to 4.5% or 4.75% and leave it there for a while as inflation looks set to be stickier than the BOE assumes in its central projections, National Institute of Economic and Social Research Deputy Director Stephen Millard told MNI.

The Bank has assumed that after peaking at around 11% inflation would drop back below the 2% target by Q2 2024 even if Bank Rate was left at 3%, but Millard said NIESR's analysis suggests elevated inflation is widespread and likely to be persistent. The Treasury's Autumn Statement also amounts to a near-term fiscal easing, with the tightening effect from tax rises and spending cuts coming beyond the BOE’s three-year policy horizon.

Energy, as well as food, have been key drivers of inflation, but an eventual stabilisation or decline in these prices may be insufficient to get inflation back sustainably to target.

MORE THAN FOOD AND ENERGY

"Inflation is more than just food and energy now. It has become much more broad, and our evidence for that is in our tracker where we have a trimmed mean measure of iinflation and that has been going up consistently and that has kept going up even as headline has slackened a bit," Millard said in an interview.

"You need to be raising interest rates and you may need to hold them higher for a longer period of time because that non-food and energy inflation we think is going to be more persistent than the Bank and the OBR (Office for Budget Responsbility) think. They need to go to the four-and-a-half, four-and-three-quarter level and they will need to stay there for a while," he added.

NIESR's inflation tracker is at around 8.5%, compared to headline consumer price inflation of 9.6% in October.

OPTIMAL POLICY PATH

The Bank's November press conference centred around the steer from Governor Andrew Bailey and colleagues that Bank Rate would not have to rise as far as the 5.25% markets had factored in, with Bailey saying it was likely to peak nearer to 3% than 5.25%. Millard, a former senior economist at the BOE, said it would have been much clearer if the Bank had simply revealed the optimal monetary policy path that it had in mind. (See MNI POLICY: BOE Points To 4% Peak At Most, Then Rate Cuts)

"If you have an interest rate path in mind why not publish it? Let people know what it is. This particular Monetary Policy Report was screaming out for it." Millard said.

While former Monetary Policy Committee member Jan Vlieghe pushed hard for this approach the Bank has repeatedly refused to publish its rate projection, instead just releasing constant and market rate projections.

FISCAL LOOSENING

The Bank went through the Monetary Policy Report forecast round in late October, before Chancellor of the Exchequer Jeremy Hunt unveiled his Autumn Statement, effectively a full Budget, on Nov 17. The MPC will now have to consider this at next month's meeting.

"What the Autumn Statement did, if anything, is it loosened fiscal policy for the next couple of years even relative to where we were previously," Millard said, noting the increased welfare payments and uplifting of benefits and pensions in line with inflation over 2022 and 2023, towards the beginning of the three-year forecasting period the BOE uses when considering monetary policy.

"After that that is when the tightening really kicks in. There is about GBP60 billion of tightening kicking in by 2027/28 of which GBP30 billion is tax and GBP30 billion is spending, very roughly," Millard said.