Bigger rate hikes may be on the way as Bank gets tough on inflation

Interest rate-setters have signalled that bigger hikes may be on the cards as the Bank of England looks to do “whatever is necessary” to stop rocketing inflation from becoming long-term.

Deputy governor Sir Jon Cunliffe told the BBC Radio 4’s Today programme the Bank would take action to stop the recent surge in inflation to 40-year highs from becoming embedded in the economy.

And the Bank’s top economist, Huw Pill, said separately in a speech that interest rates may need to rise at a quicker pace to rein in “uncomfortably high” inflation.

The Bank has increased rates at five meetings in a row to tackle the recent jump in inflation, which has already hit 9.1% as the cost of living squeeze tightens its grip.

But so far each rise has been by a quarter point, with the Bank taking a gradual approach as it balances the risk of choking off economic growth.

Sir Jon said the Bank faces a difficult balancing act.

He said: “We will do whatever is necessary to ensure that as this period of inflation goes through the economy, it does not leave us with a persistent domestically generated inflation problem.

“We will act to make sure that doesn’t happen.”

But he added: “What we expect is that the cost-of-living squeeze will actually hit people’s spending and that will start to cool the economy.”

“We can see signs that the economy is already slowing,” he said.

The Bank said in June that it would “act forcefully” to tackle the threat of long-term high inflation.

Mr Pill – who succeeded Andy Haldane in the role last September – told a central banking conference hosted by King’s Business School that this pledge “reflects both my willingness to adopt a faster pace of tightening than implemented thus far in this tightening cycle, while simultaneously emphasising the conditionality of any such change in pace on the flow of new data and analysis”.

He stressed that “much remains to be resolved before we vote on our August policy decision”.

“How I vote on that occasion will be determined by the data that we see and my interpretation of it,” he said.

Fears are mounting that a recession – as defined by two quarters in a row of falling output – may be on the way as the cost crunch hits consumer spending.

Economists expect the economy to contract in the second quarter and there are concerns output may plunge at the year-end when soaring energy prices see the price cap lifted again in October.

The Bank has already warned that inflation is set to rise past 11% in October.

But Mr Pill echoed Si Jon’s worries over the threat to growth: “The MPC (Monetary Policy Committee) has to navigate a ‘narrow path’ in managing these risks.”