The Bank of England will probably need to raise interest rates in December and again in early 2027 to combat rising inflation, its chief economist has said.
Huw Pill told the Financial Times that the decision earlier this month to lift rates from 3.75% to 4% was a "significant step" towards getting monetary policy into a better place, but added that "we have further to go". His comments point to sharply higher mortgage payments for an estimated 2.3 million homeowners who will have to refinance their loans next year.
"My view would be, we will see evidence that motivates further rises," Pill said, adding that the central bank would "do what is necessary to get inflation back to 2% through time".
Pill is one of several Bank policymakers who believe the UK economy has gained strength over the past year, handing workers greater power to bid up wages. Recent figures showed the economy grew by 0.7% in the third quarter, producing an annual growth rate surpassed only by the United States among the G7 group of wealthy countries.
With inflation expected to climb to 5% next spring, driven by high oil and gas prices linked to the Iran war, Pill expects public and private sector workers to demand substantial pay increases, a development that would keep inflation elevated for longer.
The chief economist said he regarded an end to the US-Israeli conflict with Iran and a fall in energy prices as a "very low probability", indicating to the newspaper that he was poised to vote for another quarter-point increase in December.
"My bias, for what it's worth, is that I worry about the inflationary impact being magnified by second-round effects," he said, adding that he believed the central bank should have moved sooner against inflation. "In my view, we waited too long."
While the Bank has not yet seen evidence of rising wages or companies passing higher costs on to consumers, Pill said the absence of evidence was not evidence of absence. He suggested that as next year unfolds, some evidence will begin to appear, though it could point in either direction.
Financial markets expect UK interest rates to rise to almost 5% in 2027. Pill described those expectations as "not outrageous", hinting he could support larger increases in borrowing costs at coming meetings of the monetary policy committee because the "ability to be modest [in the scale of rate rises] has diminished".
City analysts have read the increasingly hawkish tone of Pill and other MPC members as making a December rate rise almost inevitable. There is disagreement, however, about the economy's strength, with many concerned that dearer borrowing will hit manufacturing and a construction industry that has contracted for much of the year. Households are also likely to rein in spending in the new year, when the energy price cap is expected to rise to almost £2,000 for a typical home and council tax bills increase by an average of almost 5%.
