Huw Pill, the Bank of England’s chief economist, does not yet seem convinced by the case for an August interest rate cut, but said a rate reduction was still a “when-rather-than-if”.
In a speech delivered at Asia House in London, Pill said that recent pieces of economic data pointed towards some “upside risks to my assessment of inflation persistence”.
Pill was referring to the most recent figures on services inflation and wage growth, both of which have been identified by the Bank as good indicators of the persistence of inflation.
He said annual services inflation and wage growth “continue to point to an uncomfortable strength in those underlying inflation dynamics”.
Services inflation came in at 5.7 per cent in May, down from 5.9 per cent in April. Annual wage growth in the private sector, meanwhile, is still running around six per cent.
Although the headline rate of inflation has fallen to the target, economists at the Bank worry that it will be difficult for inflation to remain at two per cent while those underlying price pressures remain strong.
Pill acknowledged that these were “noisy data series”, but he still argued that “it is hard to dispute the case that inflation persistence in the UK continues to prove – well -persistent.”
“More data will come before we take our next policy decision at the MPC meeting on 1 August,” Pill said. “But we have to be realistic about how much any one or two releases can add to our assessment”.
The Bank of England left interest rates at 5.25 per cent at its most recent meeting in June, but the minutes revealed that the decision was “finely balanced”.
Following Pill’s comments, the pound rose just under 0.4 per cent against the dollar while the FTSE 100 edged lower as traders reduced their bets on the chance of an August rate cut. Markets think there is a 50 per cent chance that the Bank will cut rates next month, down from over 60 per cent before Pill started speaking.
Despite his concerns about the persistence of inflation, Pill still felt confident that higher interest rates had helped contain inflation.
“The latest data also remains consistent with the view that these inflationary pressures have now been contained, and may be starting to revert towards levels that are more consistent with the achievement of the inflation target,” he said.
“In the absence of any big new shocks, the ‘when-rather-than-if’ characterisation of prospective Bank Rate cuts still seems appropriate,” he added.