Bank of England Governor, Andrew Bailey, told MPs there are "powerful downward forces" on inflation this year, but the Bank still raised interest rates because of concerns that price rises may persist.
“We have got the largest upside skew on our forecasts that we have ever had on inflation… so we do put wait on the persistence rise this year but there are very powerful downward forces this year all things equal,” Bailey said.
Bailey was speaking to the Treasury Select Committee at Westminster and told MPs the Monetary Policy Committee, which sets interest rates, remained “concerned about persistence” of inflation.
But the Bank's projection "indicates that inflation will probably come down below 5% by the end of this year".
“There are very powerful base effects that are going to come out this year and that puts a powerful negative trajectory on inflation unless we have some event in the world that we do not know about at the moment,” he commented.
“A lot of that is down to energy prices,” he noted.
Bailey was also questioned on the impact of whether giving into demands for big pay rises would "fuel wider inflation".
He noted there is now "quite a wedge between private and public sector pay" in terms of how fast wages are growing with private sector pay up by 7.2% in the three months to November 2022 compared with a year earlier versus 3.3% in the public sector.
"I'll be careful what I say here," he said, before adding that the risks to inflation of handing big pay rises to nurses and teachers "depends on how it's funded".
He said: "I don't think you can say there's no effect. I'm not advocating anything at this point, because this is not territory the Bank of England would want to be in. But in the economics of it, I think it depends whether you raise taxes or whether you borrow, frankly."
He also urged everyone to be "forward looking" in terms of pay demands.
"What I would urge is that, particularly going forwards - because we think inflation is going to fall very rapidly - that that is taken into account."
Another BoE policymaker said she believes interest rates are "too high right now".
MPC member Silvana Tenreyro told the committee that a "fall in inflation is pretty much guaranteed".
However, she warned that just a fifth of rate rises have fed through to the economy.