Bank of England rate hikes likely despite energy cost freeze
Chief Economist Pill says action is needed to bring inflation down over the longer term
Gabriel Thomas (GT)May 9, 2025
The Bank of England's chief economist said on Wednesday that Liz Truss' plans to freeze energy bills for households and businesses are likely to force the central bank to raise interest rates, although they will bring inflation down in the coming months.
Asked by MPs on the Treasury Committee if the package would result in higher interest rates, Huw Pill said: "In response to the question of whether fiscal policy will fuel inflation - we are here to make sure it doesn't fueling... Our task is to bring inflation back to the target level."
"We still have work to do," he added.
Pills, who appeared alongside Governor Andrew Bailey and two other members of the Monetary Policy Committee, came after she was repeatedly asked by MPs to comment on the UK's new Prime Minister's expected bailout package of more than £150bn. to be financed by government borrowing.
Bailey declined to comment specifically on the expected bailout, saying the government has yet to announce the measures, which Truss will announce on Thursday. However, he added: "We need to take the actions we need to take to reach the inflation target, however tough that may be in terms of consequences," explaining that the bank's focus is on bringing inflation back to their 2 percent target.
Pill told the committee that the energy crisis is hitting homes hard. "High gas prices are having an impact on UK income," adding that inflation would be affected in two ways if the pain were offset by higher public borrowing.
In the coming months, the effect of the energy bill freeze would likely prevent inflation from rising further in the fall from the 10.1 percent it hit in July. "This will bring headline inflation down compared to what we forecast in our August report.
However, he added that interest rates do not depend on price developments in the coming weeks. “Perhaps this very short-term impact on inflation is not the most important thing from a policy perspective. What matters from a policy perspective is what the impact of the package of measures . . is on inflation over the longer term,” said Pill.
He added that the likely outcome of the energy bill freeze and tax cuts would be to increase spending in the economy, which "would likely result in slightly higher inflation".
Line chart of CPI inflation with forecasts (YoY, %) shows: Freezing energy bills lowers peak consumer inflation but raises it later Asked whether a recession was necessary, all four BoE officials blamed Russian President Vladimir Putin's invasion of Ukraine and his decision to cut gas supplies to Western Europe for the downturn they were experiencing in the UK this winter expect.
However, Bailey acknowledged that the MPC did not seek to offset a recession by cutting interest rates in August as it is its job to look after prices.
There was some disagreement among BoE officials on how quickly interest rates would need to rise to offset the risk of inflation. Catherine Mann, one of the MPC's external members, said faster rate hikes would help lower inflation expectations, which she said had already risen too much.
However, another external MPC member, Silvana Tenreyro, said that even if the BoE had left interest rates on hold at 1.25 percent in August instead of raising them to 1.75 percent, that would probably be enough to push inflation back up in the medium term to reach the target level.
She was among a minority on the committee to urge caution, adding that rate hikes are best done "slowly when there is a lot of uncertainty".
