Bank of England chief economist Huw Pill said whether those who left the labor market during the pandemic will return is one of the biggest unknowns facing the UK economy. , as he indicated that the rise in interest rates still had some way to go. efforts to bring soaring inflation back to the central bank’s 2% target.
Cardiff-born Mr Pill, who took his three-year term as the bank’s chief economist last September, voted in line with the Monetary Policy Committee’s majority position to raise rates by 0, 25% to 1% at the beginning of the month.
With the impact of soaring energy and food costs – which, following supply chain problems caused by Covid, have been exacerbated by the Russian invasion of Ukraine and a new wave of pandemic lockdowns in China – inflation, currently at 9%, is forecast by the central bank to hit 10% by year-end.
There was criticism, particularly from some Tory MPs, that the bank should have acted earlier on interest rates to ease inflationary pressures and even voices calling for an end to the independence of the bank vis-à-vis the government after 25 years.
Mr Pill said: “I think it’s fair that we are judged to some degree on results and the current result on inflation, given our target (2%), is very uncomfortable for us. Of course, the results always depend on what you do, however, I think what drove inflation up was largely external blows, so high energy prices, especially oil and gas , and also higher prices of goods that resulted from supply chain disruptions, etc.
Although there was no certainty, Mr Pill said he was confident the rate of inflation would come down, with the bank expecting it to return to the target in 2023-24.
Mr Pill said: “In our forecast, we assume commodity prices will stabilize and base effects will kick in.
“But we cannot be complacent and assured that this is the case, because these things are very difficult to predict.
“However, there are plenty of reasons to think why they might go down.
“If you look at what financial futures markets are pricing, and these are people who have money at stake, so you would think they would have a good incentive to interpret the information correctly, they are forecasting gas and oil prices oil will decline over the next two to three years.
“If that’s the case, we’ll see inflation fall even more than our forecast.”
He added: “In this tight labor market, wage demands and settlements are strong as people try to catch up with the inflation we have already seen.
“So what we’re hoping and expecting, as headline inflation picks up, not only does that mechanically lower headline inflation, but it eases some of the wage pressure because people don’t feel under the same pressures to catch up.”
The economist said there was a balancing act the MPC had to perform as too little action on interest rates could allow inflationary pressures to take root in the economy, while too aggressive a move could stifle economic growth.
Mr Pill said: ‘When you think about it in policy terms you run too much risk of falling and getting stuck in a deep recession which is very costly and too little you run the risk of inflation becoming self-sustaining. momentum and away from the target.
“So the challenge for us on the MPC is to find that path on rates…that allows us to stay the course and get back to 2% inflation.”
He said it was crucial to achieve 2% inflation in a sustainable way.
He explained: “Where I think sustainably means medium-term oriented, but also sustainably in the sense that you haven’t put the economy in some kind of comatose state. It is therefore this balance that must be maintained. »
“This balancing, due to higher inflation, resulted in an additional 0.25% increase in the MPC base rate in its May decision.
Mr Pill said: ‘I personally think there is still a long way to go in this transition from what has been a very supportive monetary policy to the economy, and really going back to the financial crisis, through the fallout from the Brexit and the pandemic.
“And we need to take not necessarily a super restrictive stance, but a stance that takes away some of that support and is more reflective of the fact that inflation is higher and labor markets are tighter and so on.
“It’s a process of transitioning from one view of monetary policy to another that’s started. We’ve done a lot and started raising rates, we’ve stopped buying assets and started cutting assets, but I think there’s still a lot to do and that’s why I expect to see more moves in the direction we’ve seen over the next few months.
British labor market
According to the latest figures from the ONS, while the UK unemployment rate is at its lowest level since the early 1970s – with more job vacancies than people looking for a employment in the economy – hundreds of thousands of people have left the labor force since the pandemic.
While welcoming the drop in unemployment, Mr Pill said: “It is important to see that this (labour market) tightening also reflects the fact that many people have left the labor market.
“A key question for us is whether they are going to come back and behind that is also the question why did they leave?
“There was a pool of young people basically, who in the face of the pandemic decided to stay in education because they couldn’t find a job.
“It was natural and we see these people coming back.
“However, there is another group of people who, if you wish, have decided to retire earlier or sooner than they otherwise would have. I think this is a pool of people who went directly from employment to inactivity.
“Today, historically, people who go from employment to inactivity tend not to return. So that’s a bit of a concern for us.
“The open question though is historical behavior, which was obviously not in the context of a pandemic, a good guide to behavior over the past two years?
“On top of that, and it’s something we’ll be looking at very carefully, is the extent to which people have moved because they’re reporting long-term illness.
“So there’s a direct issue there that’s long Covid, but I also think there’s people who don’t have long Covid but have health issues, who in the past didn’t think be obstacles to going to work.
“However, in a Covid environment, they feel more vulnerable, so they may not come back. The ways of working are also changing.
“Do we expect these working methods to take into account that people want more flexibility and the possibility of working from home and how does this affect things?
“So I think there’s a lot to be gained there and I think trying to figure that out is pretty essential and difficult in terms of real labor market prospects.”
Mr Pill attended Whitchurch High School, Cardiff.
Former pupils of the school include footballer Gareth Bale, rugby player Sam Warburton and Tour de France winning cyclist Geraint Thomas.
Although he has spent most of his career in Germany and the United States, you can still detect a tinge of Cardiff in his accent.
He said: ‘I did O levels and then maths, physics and chemistry for A level at Whitchurch.
“I did not study economics or consciously think that one day I would be the chief economist of the Bank of England.”
Laughing, he added: “If I had thought about that at 15, I would have been more worried about myself. However, when I was appointed to this position, my name was in the media and I got a lot of emails, including one from a guy I went to primary school with (Eglwys Newydd).
“He said that when we were 9 or 10 years old, the teacher asked us what we wanted to be when we were adults. He claimed, but I don’t remember, that I said I wanted to be an economist.
His parents still live in Whitchurch. Mr Pill said: “I come back to see them when I can and for things like rugby matches.
“People tend to feel more Welsh when they’re not in Wales and I think there’s an element of me that buys into that.”