One of the Bank of England’s most dovish of interest rate-setters has warned that the Bank is powerless to control the current rise in inflation by raising rates.

In a speech earlier this week to the Centre for Economic Policy Research, Professor Silvana Tenreyro said that hiking interest rates at this time is unlikely to have any impact on curbing inflation because the recent jumps in energy prices are global in nature and prompted by supply chain disruptions.

Tenreyro, who is a member of the Bank’s nine-strong Monetary Policy Committee, points out that some of these direct energy price rises are short-lived, and that monetary policy can do little to offset them. 

She said: “Much of the effect of policy would not come until after their impact had faded; more important will be any indirect effects of energy prices on real incomes or production costs. The effects of supply chain disruption should also be temporary, and unwind as supply of some goods increases, and as demand rotates back towards pre-Covid consumption patterns.

The latest intervention from Professor Tenreyro, who lectures at the London School of Economics, adds more tension to the debate over whether the Bank’s MPC will vote for a rise in interest rates at next week’s meeting in a bid to head off inflation.

Markets are divided over whether interest rates are the right tool to be used to halt what many had hoped would be a “transitory” rise in inflation. Tenreyro’s analysis of recent energy hikes and supply chain problems support the view that price rises should settle down again once some of the supply bottlenecks are sorted out.

It was also the conventional view held at the Bank of England until recently, with the Bank’s Governor, Andrew Bailey, hinting that rates are unlikely to rise until next year.

However, that view has been revised after the recent forecast from the Bank’s Chief Economist, Huw Pill, that inflation is heading for 5 per cent, prompting many to speculate that the markets are already pricing in an interest rate rise from the record low of 0.1 per cent. 

Yet many economists also fear that any premature rise in interest rates – coupled with the recent tax rises – will damage what is an already fragile economy.

You can read the full transcript of the speech on the Bank of England website, here.