Despite returning to the two per cent target, inflation still needs to be “squeezed out” of the UK economy, Bank of England chief economist Huw Pill said today.
Pill’s warning came the day after the Bank of England cut interest rates for the first time since March 2020, but the chief economist said it should not promise more rate cuts in the “immediate future”.
“We’re not out of the woods, but we do think we are making progress,” Pill said, but noted that the drop in inflation was mostly due to falls in food prices, energy prices and tradable good prices.
“Those developments are largely driven by developments in the global economy,” he explained, leaving the UK vulnerable to a price shock that could reignite price growth.
Instead, the Bank of England was aiming towards a more sustainable path for inflation, the chief economist said, as services inflation continues to remain elevated.
“I think we can’t be complacent, we can’t declare ‘job done’ because there are some sort of dynamics in the UK economy, a sort of persistent component, that we need to be cautious about,” Pill added.
Moving interest rates to five per cent yesterday came down to a 5-4 vote within the Bank of England, with Pill actually voting against the cut, describing it as a “finely balanced decision”.
Fergal Shortall, director of monetary analysis at the Bank of England, added the central bank was still worried about an alternative where past high inflation has lingering effects on wage and price setting “for some time to come”.
However, he said it was “comforting to see” that businesses were no longer foreseeing a sharp pickup in inflation, as their expectations were pretty much back to the two per cent target.
In contrast, household expectations for inflation are still above five per cent, and “this might be affecting their thinking when entering into wage negotiations”.
Pill also acknowledged the recently announced public sector wage hike, and said that while it was not taken into the Bank of England’s models, they were informed by the Treasury before the decision announced yesterday was made.
Pill said the Bank does not expect “a big impact” from the hike, as public sector wages have historically not been a “powerful or important channel” in determining wages in the private sector, the main culprit for wage inflation.
Yesterday, the chief economist was also reappointed to the Bank’s Monetary Policy Committee for three more years.