Huw Pill, chief economist at the Bank of England, called for a “gradual” approach to cutting interest rates, citing continued concerns about the potential upside risks to the inflationary outlook.
In a speech this morning Pill said there was “ample reason for caution” when assessing the dissipation of inflationary persistence.
“While further cuts in Bank Rate remain in prospect should the economic and inflation outlook evolve broadly as expected, it will be important to guard against the risk of cutting rates either too far or too fast,” he said at an event held by the Institute for Chartered Accountants for England and Wales.
“The need for such caution points to a gradual withdrawal of monetary policy restriction,” he said.
The pound rose 0.25 per cent against the dollar to trade at $1.315 shortly after the speech.
The Bank has laid out three scenarios for interpreting the inflationary outlook, reflecting varying degrees of inflationary persistence.
Pill said he put most weight on the middle case, which factors in a self-sustaining process of disinflation, partly driven by a restrictive monetary policy stance.
However, he remained concerned about “the possibility of structural changes sustaining more lasting inflationary pressures,” which reflects the third case in which inflationary pressures prove much more durable.
Pill said that the Bank’s approach needed to be “robust across the various cases”, ensuring economic stability in any of the Bank’s cases.
The Bank cut interest rates for the first time since the pandemic in August, a decision which Pill opposed. In his speech he said August “was somewhat too early” given the inflationary risks.
Markets expect the Bank to cut again in November, having left rates on hold in September.
Pill’s comments reflect a split in the Monetary Policy Committee (MPC). In an interview with the Guardian yesterday, Governor Andrew Bailey suggested that the Bank might become a “bit more activist” regarding interest rate cuts if there continued to be progress on inflation.
Bailey’s comments were seen as a shift from his previous remarks. The pound fell sharply in response while the odds of back-to-back rate cuts increased.