Last Updated on November 5, 2022 by Bitfinsider

Chief Economist Huw Pill told Bitfinsider on Friday that the Bank of England is still dedicated to achieving its “primary goal” of reducing inflation, but the central bank is hoping that markets will “re-anchor” their expectations for interest rate levels.

On Thursday, the central bank increased interest rates by 75 basis points, the largest single increase since 1989, and warned of a prolonged recession while also looking to temper market expectations for further aggressive monetary policy tightening. This was the largest single hike since the central bank began raising interest rates in 1989.

However, price increases reached a 40-year high of 10.1% in September, and it is anticipated that they will reach their peak in the fourth quarter of this year. The Bank of England has an inflation goal of 2%.

“We need both to be hiking the bank rate and also to be taking moves to diminish the quantitative easing portfolio, in order to tighten policy,” Pill added. “This is the only way we will be able to achieve our goal.”

“And the fact that there have been these disturbances in markets, which have had their own demands to be addressed, that hasn’t deterred us or deflected us from this medium-term fundamental goal of what the Monetary Policy Committee is seeking to do,” the statement reads.

Pill suggested that recent volatility in the British economy, such as the panic in the bond and currency markets that greeted the fiscal policy announcements made by former Prime Minister Liz Truss in late September, had distorted market expectations for the Bank of England’s future path for hiking interest rates.

According to Pill, “We do not believe that interest rates would need to climb as high as the market has been pricing, specifically because doing so would produce a slowdown in the economy that is larger than is required to keep these inflationary dynamics under control.”

The Bank forecasts that the current economic downturn, which started in the latter half of 2022 and will now last until the middle of 2024, will be the longest period of GDP contraction since records first began being kept.

“What we are seeking to do, and what we are always seeking to do, is to find that balance that gets us back to our 2% inflation target without generating unnecessary and costly problems in the real side of the economy,” Pill said. “What we are seeking to do, and what we’re always seeking to do, is to find that balance that gets us back to our 2% inflation target.”

“And so, it’s creating that balance, signaling that balance, that was really our major message yesterday,” the speaker continued.

On Thursday, the Bank of England issued guidance to the markets that was uncharacteristically direct. Pill said that this was done because the Monetary Policy Committee was trying to “re-anchor its own thinking in the more fundamental drivers” of inflation. This was done because recent months have been marked by a period of political and economic unrest.

He explained his statement by saying, “I think we’re attempting to re-anchor our communication on a forecast that stresses those more fundamental fundamentals.”

“And I think we’re hoping, and we’re intending that gives an opportunity for markets to re-anchor their thinking, and ultimately their pricing, in that sort of world looking through and beyond the disturbances that we’ve seen over the course of the last few months,” he said. “And I think we’re hoping, and we’re intending that gives an opportunity for markets to re-anchor their thinking, and ultimately their pricing

After the market’s response to Truss’ tax-cutting “mini-budget,” which left pension funds on the verge of collapse and sent the pound to an all-time low, the Bank of England was forced to intervene in the U.K. government bond market in September with an emergency two-week gilt purchase program. This came after the market’s reaction left pension funds on the verge of collapse.

Since former Finance Minister Rishi Sunak was installed as Prime Minister, the financial markets have demonstrated some degree of stability. As a result of his return to a budgetary policy that is more cautious, the pressure that was being placed on the Bank to act even more forcefully on inflation has been eased.