BoE signals divided stance on UK inflation

Bank of England policymakers used events alongside IMF meetings in Bangkok on Oct. 14 to set out contrasting views on the outlook for UK inflation and interest rates. Chief Economist Huw Pill and Governor Andrew Bailey both highlighted progress in containing broader price pressures, while warning that ongoing external shocks could complicate efforts to return inflation to the 2% target.

Pill spoke at a Citi event, where he focused on the interaction between market expectations, wage dynamics and geopolitical developments. Bailey, in separate comments in Bangkok, stressed that the persistence of current shocks would influence how difficult it becomes to get inflation back under control.

Pill said he was sceptical that market pricing for four 25-basis-point Bank Rate hikes over the next year was "obvious" or appropriate. His remarks contrasted with market pricing on Oct. 14, which showed investors treating a quarter-point rise at the November Monetary Policy Committee meeting as near-certain and anticipating additional increases through the following year.

The gap between Pill’s caution over the scale of further tightening and firm market conviction about a near-term move underlined a divergence between at least some policymakers and investors. Pill nonetheless acknowledged that the Bank still faced the task of keeping policy sufficiently restrictive to secure a sustained return of inflation to target.

Pill identified the Iran war as a growing concern for the UK inflation outlook. He said the implications of the conflict were becoming clearer as inflationary for the UK in a more persistent way, rather than a short-lived shock. He warned of a risk that such pressures could help generate some self-sustaining momentum in inflation.

Bailey noted that broader inflation pressures had so far been subdued, suggesting that earlier shocks had not yet translated into more generalised price increases. However, he cautioned that "the longer this goes on, the harder it gets," implying that the duration of energy and geopolitical disruptions could force more persistent policy responses.

Pill pointed to recent wage developments as a mixed signal for policymakers. He said that a slowdown in pay increases was a positive factor for the inflation outlook, indicating some easing of domestic cost pressures.

At the same time, Pill emphasised that pay growth remained, at best, at the upper end of the pace consistent with meeting the Bank’s 2% inflation target. This assessment suggested that, even with some moderation, wage trends still required careful monitoring as the Monetary Policy Committee weighs how far and how fast to adjust interest rates.