The Bank of England may have to take additional action if higher wages and other domestically driven inflation pressures persist longer than the central bank expects, BoE Chief Economist Huw Pill said on Friday.
"A major assumption in our projection is that we do not see persistence arising in wage and domestic cost developments from the middle of next year, resulting from these second-round effects," Pill said.
"It is the lack of it, as well as the fact that policies, including monetary policy, do enough to avert it, that is critical to returning our inflation rate to target. If we saw developments that were inconsistent with that assumption, we would have to consider taking further action."
Pill was speaking a day after the BoE hiked interest rates for the second time in two months and said that more modest tightening would be required in the coming months to ensure that the UK doesn’t suffer so-called second-round effects from high inflation.
"As long as things play out largely as we predict," Pill said, "we would expect to see a further modest tightening of monetary policy, which would embrace a rise in the bank rate. Given the nature of the shock, real incomes in the UK will suffer to some extent. That can't be avoided."
On Thursday, several officials pushed for a bigger step, and markets responded by pricing in increases at three of the next four meetings as the central bank predicted inflation will hit 7.25% in April, and the UK faces a cost of living crisis that will squeeze incomes by the most in at least 30 years.
Nonetheless, Pill cautioned that the BoE's estimates indicated that inflation will fall below target in the future, and drew attention to Governor Andrew Bailey's comments that markets should not get carried away.