Bank of England Chief Economist Huw Pill said on Thursday that a "prompt but modest" rise in interest rates would be useful to head off the risk that inflationary pressures linked to the Iran war become embedded in the British economy.
Speaking at an event hosted by NatWest, Pill repeated the view that policymakers should consider whether it is preferable to raise rates sooner rather than later. He noted the potential costs of waiting until markets force action, saying:
"If you wait until the market is forcing you to move, I think that may involve more challenges for the central bank than if you act a little more actively."
Pill, who was the sole member of the Bank's rate-setting committee to vote for an increase in borrowing costs at the April meeting, argued that modest, timely action would shape how businesses and workers respond to a rise in headline inflation.
He emphasised that such steps could influence wage and price-setting behaviour and thus reduce the likelihood of higher inflation becoming self-sustaining through second-round effects.
Earlier on the same day, BoE Deputy Governor Sarah Breeden was reported as saying that interest rates did not need to rise in June or July. BoE Governor Andrew Bailey has likewise indicated a preference for allowing more time to assess incoming data before deciding on further policy moves.
Pill assessed the risk of so-called second-round effects - where firms raise prices or workers seek higher pay in response to an energy-driven spike in inflation - as likely to be weaker than following Russia's full-scale invasion of Ukraine in 2022. He tied that assessment to what he described as current weakness in the labour market.
However, Pill also cautioned that it was not clear the labour market was as loose as during past oil-price spikes in 2008 and 2011, periods that did not produce significant second-round inflation effects. That uncertainty about the labour market's condition informed his view that modest pre-emptive action could be warranted.
Alongside concerns about inflation driven by the Iran war, the chief economist noted that political pressure on Prime Minister Keir Starmer had coincided with a recent jump in long-term British government borrowing costs, which rose to their highest levels in nearly three decades.
When asked about the implications of higher long-term yields, Pill said the Bank might want to offset some of the strain those increases place on the economy, but he emphasised that intervention would not be appropriate if market rate rises were being driven by inflationary expectations.
The remarks outline the narrow path facing the BoE: balance the risk of inflation becoming entrenched against the economic effects of higher borrowing costs, while monitoring labour-market indicators and incoming data to time any further tightening.