LONDON: Bank of England (BoE) chief economist Huw Pill says interest rates may remain steady or even decline if the UK economy’s growth spurt stalls next year.

He said the decision to raise rates a quarter-point to 4% last Thursday was “preemptive” rather than based on evidence that inflation is spreading widely across the economy.

The Monetary Policy Committee (MPC) was forced into action by a worsening energy shock but it also pointed to a resilient economy after a string of surprisingly strong growth figures.

Financial markets see a 60% chance of a follow-up hike next month and are betting on at least two increases over the next 12 months.

However, Pill, one of the most hawkish BoE officials, raised the possibility that further rate rises could be avoided if the economy finally buckles under pressure from another cost-of-living crisis.

“There is a possibility that bank rate remains on hold or even falls were we to see a stalling of growth in the economy, a weakening of the threat of second-round effects,” he said in an online briefing last Friday.

“There are these upside risks stemming from energy and so forth, but there are also question marks about whether this resilience we’ve seen in the economy, in both growth and employment, will be sustained.”

The MPC unanimously backed raising rates for the first time in over three years and signalled that more are likely if the Iran war drags on.

However, the situation is changing rapidly with oil and gas prices plunging last week after the crushing defeat for the Republican party in the US midterm elections raised hopes of an end to the conflict.

While figures this week are expected to show the economy grew a robust 0.7% in the third quarter, there are already signs that households may be starting to tighten their belts with domestic energy bills set to leap by a quarter in January.   

Economists were caught off guard by the surge in gross domestic product in 2026.

The BoE has predicted the economy will grow 1.6% this year, the strongest expansion in four years, but it expects momentum to ease in 2027 and 2028 as pressure on consumers and businesses builds.

Pill ruled out a repeat of the aggressive rate increases experienced after the 2022 inflation shock, adding that the scale of the energy price increase is smaller than after Russia’s invasion of Ukraine. 

“There is a sort of preemptive character to the decision yesterday,” Pill said.

“Whether we see one more rate hike or not, that will play out over the next few weeks.”

He added that the MPC will have clearer evidence on the threat of second-round inflation effects caused by the energy shock by the spring.

Crucial will be whether workers demand higher pay and companies respond by raising prices in an effort to boost their profit margins. — Bloomberg