𝓤𝓷𝓲𝓽𝓮𝓭 𝓝𝓮𝔀𝓼

Policymakers should not use the “fog of uncertainty” as a reason not to act to combat the risks of rising inflation due to the Iran war, according to the Bank of England’s top economist.

Huw Pill, chief economist at the Bank, said he stands “ready to act” if needed to rein in inflation as he warned he sees “upside risks to price stability mounting as a result of events in the Gulf”.

In a speech delivered in North Macedonia, Mr Pill said: “The fog of uncertainty in which we always operate cannot be an excuse for inaction.

“Uncertainty is always present (perhaps especially so of late), but the task of monetary policy makers is to provide clarity on their pursuit of the price stability objective in that uncertain world.”

His comments come amid mounting expectations that a rate hike could be on the way as the fall out of the Iran war is set to send inflation soaring.

The Bank’s nine-strong Monetary Policy Committee voted unanimously to hold rates at 3.75% last week and signalled it was ready to raise borrowing costs should war in the Middle East keep energy prices elevated.

It warned that inflation was now set to reach up to 3.5% by the third quarter – well above its 2% target.

The Bank had been expected to cut rates before the conflict began on February 28, but financial markets are now pricing in two or more hikes by the end of the year due to the rising inflation outlook.

The Bank will next decide on rates on April 30, when it will also have its latest quarterly economic forecasts to hand.

Mr Pill said it was the spike in wholesale oil and gas prices that was causing the biggest concern for inflation.

He said: “From a UK monetary policy perspective, for all the geo-political and geo-economic speculation of late, the evolution of global commodity prices (particularly energy prices) is of greatest importance.

“It is via energy prices that events in the Gulf will shape the outlook for UK inflation and thus monetary policy.”

He said that while monetary policy action could not control energy and fuel costs, it could help contain so-called second-round effects, such as rising wages.

He said: “The energy shocks of 2022 and 2026… both represent significant adverse terms-of-trade shocks that weigh on domestic real income and exacerbate cost-of-living of households, particularly more vulnerable, lower-incomes households.

“These are real phenomena that need to play out via real adjustments over time.

“Monetary policy cannot prevent or implement those real adjustments: it can simply provide the nominal environment in which they can occur in a less costly manner.”