Bank of England: Rate cuts when not if but Brits must wait for their ‘reward’

The Bank of England’s chief economist Huw Pill has said interest rate cuts are a matter of “when” rather than “if” policymakers “reward the economy” for progress on inflation.

Policymakers voted to hold interest rates last Thursday in their first three-way split since the financial crisis, with the Bank cautiously opening the door to cuts later this year.

Pill said in an online session on Monday that key metrics on inflation were not yet at the level necessary for policy easing.

The central bank’s governor Andrew Bailey suggested last week that the Monetary Policy Committee (MPC) needed to see more signs that the UK was making progress in its battle against inflation before reducing rates.

Pill said: “Lower interest rates are a reward to the economy for better inflation performance. It is the focus on when, rather than if, I think, that has been what the governor has tried to focus on.”

He saw early signs of progress in some areas but stressed that trends remained too tentative for the Bank to start cutting.

Pill added that the MPC did not need to see underlying inflation reach the government’s two per cent target before opting to cut as policy would need to stay “restrictive”.

Headline inflation has come down significantly from peaks of more than 10 per cent, currently standing at 4 per cent.

However, the Bank of England is particularly concerned about the labour market and service inflation. Latest figures from the Office for National Statistics suggested that unemployment is lower than previously thought, signalling continued tightness in the jobs market.

The Bank removed any references to hiking rates further on Thursday and noted that inflation had “fallen back relatively sharply” over the past few months, but gave no timetable for cuts.

Its forecasts expected inflation to briefly touch two per cent in the spring but remain above target in two years time.

The OECD warned on Monday that central banks should not cut interest rates too early or risk inflation staying above the two per cent target for an extended period of time.

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