BRITISH Retail Consortium economist Harvir Dhillon has signalled his view that the Bank of England will increase interest rates further this week as the UK continues to grapple with rampant inflation.

Speculation arose last month that the Bank would lift interest rates higher than the current 4.25 per cent after official figures showed annual UK consumer prices index inflation remained above 10 per cent in March, albeit it eased slightly to 10.1% from 10.4% in February.

Within that, the price of food and non-alcoholic drinks climbed to 19.1% in March, up from 18% the month before.

Speaking exclusively to The Herald on a recent trip to Scotland, Mr Dhillon said he believes the Bank of England will increase rates again in a bid to temper inflation. The Bank’s Monetary Policy Committee will unveil the result of its next vote on interest rates on Thursday.

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“Our expectation is that there is probably going to be at least one more interest rate rise,” Mr Dhillon said. “We think the Bank of England will [then] hold it at that level but there won’t be a swift cutting of rates, because a lot of these inflationary pressures will stick around and persist.

"We are currently expecting that those pressures will mean inflation is above target into next year. It raises the prospect the Bank of England will have to hold and stay, rather than cut quickly and economic growth returns.”

Mr Dhillon said there has been a “steady improvement” in “sentiment indices”, including the BRC’s own retail sales monitor, in the last quarter, though emphasised that people are not “overly optimistic” about the economy.

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“Our own thought is that inflation will be on a steady downward trajectory over the course of the year, however we’re a bit more concerned about the stickiness of price pressures lingering for longer than we may have anticipated before,” Mr Dhillon said.

Asked for his thoughts on recent remarks from Bank of England chief economist Huw Pill, who said people need to “accept that they’re worse off” and not seek higher pay settlements in order to avoid stoking inflation further, Mr Dhillon said he could see why the comments appeared “crass” and “insensitive”. But he noted: “Fundamentally, what he was referring to is this fact… if we see wage increases that match inflation, that is something that will sustain inflationary pressures.

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“And so, what the Bank of England is trying to do by increasing interest rates is to put the brakes on the economy. It sees wage increases as something that adds a bit of momentum to the economy. If people have got higher wages, it means they have more spending power in the economy, and they (Bank of England) assess that as a threat to their 2% [inflation] target, which is the mandate that they have to achieve.”

Mr Dhillon admitted the Bank’s use of interest rates to tame inflation is a “blunt tool” but said it is the “only tool they have got in the toolkit”.

He said: “It is arguable that inflationary pressures could have been worse had those actions [to increase interest rates] not been taken. If we think there is already enough demand in the economy to keep the economy expanding, and we avoid this technical recession that the Bank of England had been forecasting fore a number of months, effectively that means there would have been more demand in the economy. The counterfactual there is we would have been in a higher inflationary environment if they had not taken those steps.”

Recent weeks have seen major grocery retailers Tesco and Sainsbury’s reduce prices on a range of goods, especially for loyalty card holders.

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Asked whether he believes grocery retailers are keen to reduce prices for consumers, Mr Dhillon said: “Supermarkets in particular are always quite conscious that it is ultimately the health of the consumer that determines their own health, and that they need to try to be on the side of the consumer as much as possible, whether that is through having discounted ranges, [or] vouchers for vulnerable groups.

“There are various different measures that the industry will deploy and… at least from the price data that we are seeing, there seems to be some restraint on the part of retailers in holding back the full extent of the price increases they are observing on their side, when it comes to inputs or wages, for example. And they are trying to mitigate the extent of the cost pass-through that is currently being felt.”

He added that the input cost pressures faced by grocery retailers are “easing, typically on food”, having peaked in October, and notes that the BRC estimates a lag of between three and nine months in terms of that inflation beginning to ease for consumers. Many retailers have been shortening supply chains to ease costs, he said.

Mr Dhillon joined the BRC in April 2022, with a remit to focus on the major trends in retail and the macroeconomy. He leads the organisation’s shop price index, economic briefing, and retail jobs reports, as well as its diversity and inclusion and HR benchmark surveys.

Despite the challenges facing the sector, Mr Dhillon said some retailers will be viewing it as a time of opportunity. “Retail is always a dynamic and exciting industry,” he said. “They (retailers) are very agile and quick on their feet, even when it comes to pricing.

“Retail price-setting is a lot more frequent than other parts of the economy. Retailers will largely be cautious over the coming year. There is obviously the input cost squeeze that they are facing, but there is also some uncertainty about the health of the consumer by year-end as well.”