The UK is currently experiencing “about the maximum rate of pain” from rising inflation, according to the Bank of England’s deputy governor, with the possibility of a rate rise further down the line.
Ben Broadbent said it is “obviously very difficult” for British consumers at a time when prices are outstripping wage growth, but noted he expects inflationary pressure from the devaluation of sterling to peak in the coming months.
At the same time, he noted that a rate rise may still be viable even as inflation starts to fall.
Speaking to the BBC this morning, Broadbent said that even after inflation peaks, “I think there may be some possibility for interest rates to go up a little”.
However, Broadbent reiterated the Bank’s warnings yesterday that Brexit uncertainty is holding back investment.
“Investment has not grown over the last 18 months and we think that has something to do with the uncertainties related to the Brexit process,” he said.
Yesterday the Bank’s governor Mark Carney warned that he now expects the level of business investment by 2020 to be 20 per cent lower than it had forecast before the Brexit vote, dragging on growth.
The pound fell to a nine-month low against the euro in the aftermath of the Bank's warning, allied to a reduced growth forecast.
Broadbent also noted that the effects of Brexit uncertainty will grow if households and businesses start to anticipate a “cliff edge” when the UK leaves the EU, rather than a “smooth” transition deal.
So far “people are holding their nerve”, he said, but consumers could rein back their spending if a cliff edge looms.
Carney warned yesterday that a smooth transitional deal is vital to avoid an economic hit to the UK.
He said: “Any agreement that reduces access to aspects of our largest trading partner is likely to reduce the level of economic activity in this country.”