Page 1  UK monetary policy outlook − speech by Huw Pill Given at the Money Market Association of New York University (Money Marketeers) Event, New York  Page 2  Published on 09 January 2023  Speech Good evening everyone. Before I turn to the body of my remarks, I thought it would be useful to start the New Year with a few important reminders. Inflation in the United Kingdom is currently too high. Returning UK inflation to its 2% target on a lasting and sustainable basis is essential. Price stability must prevail if we are to create the environment in which firms and households can take the longer-term investment decisions that build the human and physical capital, which ultimately drives the dynamism, innovation, productivity and growth upon which prosperity and improving living standards rest. It is the job of monetary policy to return inflation to target. That is what we on the Bank of England’s Monetary Policy Committee (MPC) are mandated to do within the UK’s institutional framework for macroeconomic policy. In the face of inflationary shocks over the past eighteen months, the MPC has tightened monetary policy significantly. The Committee will continue to act as necessary to ensure the inflation target is achieved on a lasting basis over the medium term, remaining alert to new economic shocks that might create further inflation disturbances. There should be no question about what the MPC is seeking to achieve or whether it is prepared to take the necessary actions to do so.
All the more so when each layer has its own, distinctive characteristics: some drivers of inflation being more secular in nature, others more cyclical; some consistent with the ‘divine coincidence’ of efforts to stabilise demand and price developments, others implying management of difficult trade-offs between activity and inflation. But the challenges for monetary policy are greater when the factors not only cumulate, but also interact with one another in possibly divisive and often unhelpful ways as regards the pursuit of price stability. In other words, when the various underlying drivers of policy decisions are not only additive as regards their implications for inflation, but also potentially multiplicative. To give the most straightforward but also immediately relevant example: the scope for energy price rises to trigger the infamous second round effects in price, wage and cost dynamics – the dynamics that threaten to create persistence in inflation even after the original external stimulus abates – is greater when the corporate sector enjoys pricing power, and the labour market is tight. Beyond the implications of the individual risks themselves, the combination of and interaction among those risks can create additional challenges for monetary policy. This is something to which I will return in discussing the outlook for UK monetary policy. Factors underlying monetary policy decisions But let me start by reviewing the three underlying drivers of policy decisions that I just listed.