According to BoE Chief Economist Huw Pill, the size and longevity of a recent spike in inflation have been larger than expected. However, Pill mentioned that over the coming years, he expects inflation to remain relatively low.
"These inflationary pressures should become less severe as the pandemic recedes and the level and composition of global demand and supply normalise,” said Pill. “However, the extent and duration of the temporary inflation increase have proven to be larger than anticipated."
Pill’s remarks were consistent with the BoE's September policy statement, which stated that Britain's consumer price inflation rate was likely to exceed 4% - more than double the BoE's objective - and the case for a first interest rate hike since the strengthening of the COVID-19 pandemic.
Pill said the risks to the BoE's economic and inflation projections were "obviously becoming two-sided" after the pandemic resulted in an economic contraction of nearly 10% in 2020, but the BoE was unlikely to raise rates sharply.
"I expect interest rates to remain relatively low in the coming, even as the impact of the COVID-19 pandemic fades."
Pill mentioned that negative interest rates were "both viable and likely to alleviate monetary conditions," but they wouldn't solve all problems and could only deliver a limited 50 or 100 basis points of additional reduction in the Bank Rate.
A recent BoE survey revealed that British firms increased their inflation expectations. Year-ahead annual price inflation was expected to be 3.5% in the 3 months to September 2022, up from 3.2% in the August survey.
After the recent survey, a jump in energy prices and intensified supply and staff shortages prompted some private economists to predict that Britain’s consumer price inflation will reach 5%.