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Bank of England expects inflation to fall next year, Huw Pill says

The Bank of England in the city of London. The pound suffered further falls on Wednesday after the UK Government was heavily criticised by the International Monetary Fund over its handling of economic policy. Picture date: Wednesday September 28, 2022.
Bank of England's Huw Pill has indicated that borrowing costs will continue to rise to control inflation. Photo: AP

Bank of England chief economist Huw Pill said he expects UK inflation to start falling next year, assuming natural gas prices stabilise and then start to drop.

“We are expecting to see headline inflation tail off in the second half of next year, in fact quite rapidly, on account of those base effects,” Pill told a conference organised by accountancy body ICAEW.

“There’s a lot of uncertainty around the outlook for gas price developments,” he added.

Read more: Interest rates: Top Bank of England official warns further rises needed

The BoE’s chief economist said that the Bank has "more to do" on raising interest rates to control inflation, but probably not by as much as the financial markets expected.

Investors expect interest rates to increase by another half-point in December and more in 2023.

The Bank of England has raised interest rates to 3% (Yahoo News UK/Flourish)
The Bank of England has raised interest rates to 3% (Yahoo News UK/Flourish)

Pill said the Bank is concerned about tightness in the labour market, which creates inflationary pressures.

"Very low levels of unemployment and the association with the mid-1970s is not entirely reassuring from an inflection point of view.

"People in the 50 to 65 age group, relative to pre-COVID levels, are having a higher level of inactivity not being in a job and not looking for work."

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Earlier this month, Dave Ramsden, one of the Bank’s deputy governors, said he was currently supporting fresh increases in the cost of borrowing but raised the possibility that a weakening economy may require a cut.

Read more: Bank of England blindsided by ‘extraordinary’ mini-budget, Andrew Bailey says

“Given the uncertainties we face it is important also to be humble about what we don’t know or still have to learn. I favour a watchful and responsive approach to setting policy,” Ramsden said.

“Although my bias is towards further tightening, if the economy develops differently to my expectation and persistence in inflation stops being a concern, then I would consider the case for reducing Bank rate, as appropriate.”

Watch: How does inflation affect interest rates?