Bank of England warns rising inflation may continue longer than expected | Bank of England

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The Bank of England’s chief economist warned that high inflation rates in the UK could persist for longer than expected, despite wholesale energy prices falling in recent weeks and the economy on the brink of recession.

Howe Bell said that the slowdown in the British economy and the sharp drop in European gas prices could help get rid of the highest inflation rates in more than four decades. Threadneedle Street expects headline inflation – which was 10.7% in November – to ease from the middle of this year.

However, he said risks remain with “self-sufficiency momentum,” driven by workers demanding higher wages and companies raising prices for their products in response to higher rates of inflation.

Speaking at a conference in New York, Bell said: “The distinctive context prevailing in the UK – high natural gas prices combined with a tight labor market, adverse developments in labor supply and goods market bottlenecks – creates the potential for inflation to prove more persistent.”

In response to the highest levels of inflation since the early 1980s, the bank raised its main interest rate to 3.5% last month, from 0.1% a year earlier. City investors expect the central bank to raise interest rates again to 4% at the next meeting of the Monetary Policy Committee in February.

Bell said that although natural gas prices have fallen, they have remained well above historical levels, raising the risk of persistently high inflation because businesses and households may pay to offset these costs by demanding higher wages and prices.

“The more companies try to maintain real profit margins and employees try to maintain real wages at pre-energy price shock levels, the more likely it is that domestically generated inflation will pick up its own momentum,” he said.

Rishi Sunak last week promised to halve inflation in 2023, one of five pledges in his first major speech this year. Inflation hit a 41-year high of 11.1% in October. However, it was already projected to fall below 4% by the end of this year by the Office for Budget Responsibility.

Amid higher interest rates from the Bank, economists warn of a slowing economy and a sharp drop in home prices as families struggle with the rising cost of borrowing.

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More than 1.4 million households face the prospect of a jump in borrowing costs when fixed-rate mortgage loans expire this year, according to figures released Monday by the Office for National Statistics. The Office for National Statistics said the majority (57%) of UK fixed-rate mortgages coming for renewal were agreed upon with interest rates below 2%.

Private tenants are also facing an increase in their housing costs, with rental prices rising at the highest rate in the UK since records began in 2016.

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