Bank of England's assessment of UK economy hints at rising interest rates and prices

Bank of England's chief economist Huw Pill People walk outside the Bank of England in the City of London financial district, in London, Britain, January 26, 2023. REUTERS/Henry Nicholls     TPX IMAGES OF THE DAY
Bank of England's chief economist Huw Pill said the UK economy has proved 'slightly stronger than expected'. Henry Nicholls/Reuters

The UK economy may be slightly stronger than the Bank of England estimated at the start of February, according to its chief economist.

Huw Pill seemed to suggest he may be concerned that stronger demand than projected in the BoE’s February forecast will keep inflation high.

“Chief economist Huw Pill’s comments this afternoon do still support the idea that rates will need to continue to rise, when he said that inflation risks remained tilted to the upside, with the UK economy slightly stronger than expected,” said Michael Hewson, chief market analyst at CMC Markets.

The chief economist said that the Bank of England is still predicting inflation to fall below its 2% target by the end of the year but there are still risks.

"There are considerable uncertainties around this outlook, and the MPC continues to judge that the risks to inflation are skewed significantly to the upside," Pill said.

He added that these risks "arise in large part from the possibility that domestic inflationary pressures prove more persistent than anticipated, owing to so-called ‘second round effects’ in price, cost and wage setting behaviour.

The BoE chief economist also said the UK economy proved “slightly stronger than expected” over the past month and wage growth stickier than thought.

Read more: Inflation data will dictate Bank of England's next interest rate call, says Andrew Bailey

"Survey indicators that have become available since the publication of the forecast have surprised to the upside, suggesting that the current momentum in economic activity may be slightly stronger than anticipated," Pill said at Wales Week in London, at the Institute of Directors on Thursday.

In that February report, the Bank’s forecasts had predicted that real GDP would fall slightly over the coming quarters, as high energy prices and higher market interest rates continue to weigh on spending.

The chief economist also said that private sector regular pay growth was slightly higher than forecast at the end of last year.

Pill’s comments come a day after Bank of England governor Andrew Bailey gave a speech in which he emphasised that "nothing is decided" yet by the BoE monetary policy committee about interest rates.

Read more: Spring budget: Chancellor Hunt won’t have enough money to cut taxes or raise pay

Bailey said: "At this stage, I would caution against suggesting either that we are done with increasing Bank Rate, or that we will inevitably need to do more. Some further increase in Bank Rate may turn out to be appropriate, but nothing is decided."

Watch: Andrew Bailey says 'nothing is decided' suggesting interest rates may rise less than thought

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