The Bank of England’s chief economist Huw Pill has renewed calls for interest rates to be cut at a “more cautious pace” in the next year, adding to the likelihood that Bank Rate may be held at four per cent for the foreseeable future.
In a speech delivered on Friday, Pill said efforts to lower inflation over the last year had been “disappointing” as he pointed to the effect taxes had in raising prices.
Inflation is forecast to hit four per cent in September, with the Office for National Statistics (ONS) set to publish fresh data next week.
Pill, who is widely seen as one of the more hawkish members on the Monetary Policy Committee (MPC), said he expected interest rates to be cut in the next year but high inflation in recent months had become a “more pressing” issue for policymakers.
His speech also referenced his dissenting vote at the Bank’s decision to begin its rate-cutting cycle in the middle of last year as evidence of his relative caution compared to his colleagues.
“Those of you with good memories will recall that I had dissented from the decision to cut Bank Rate at the August 2024 MPC meeting,” Pill told an audience at an event hosted by The Institute of Chartered Accountants in England and Wales (ICAEW).
“I explained how concern about potential changes in the structure of price and wage setting in recent years might have rendered underlying UK inflation more persistent than in the past, which I saw as implying ample reason for caution in assessing the inflation outlook and pointed to a need to guard against the risk of cutting rates either too far or too fast.”
“Unfortunately, headline consumer price index (CPI) inflation has proved stickier than the MPC anticipated.”
He explained that he remained concerned about the pace of disinflation in the UK economy given “stickiness in services price inflation and pay dynamics”, with a rise in wage growth pushing inflation higher over the last year.
A spike in food price inflation could also “embed” in household expectations, keeping inflation higher than hoped, Pill said.
“Despite a series of further shocks to the UK economy over the past year – for example, the emergence of threats to the multilateral global trading system – the greater weight have I placed on stronger structural inflation persistence has led me to dissent from the Committee’s decision on several occasions, in favour of a slower, more cautious pace of Bank Rate reduction.”
“While I would expect further cuts in Bank Rate over the coming year should the economic and inflation outlook evolve broadly as the MPC expects, it will continue to be important to guard against the risk of cutting rates either too far or too fast.”
November’s crunch interest rates decision
At a speech earlier this year, Pill said policymakers had decided to cut interest rates too early and had lowered them at a faster pace than needed to lower inflation to the Bank’s two per cent target.
His views provide an insight to meetings held by the MPC ahead of key decisions, with his hawkishness likely to clash with the dovish external member Alan Taylor, who has warned that the UK economy risks plunging into a recession unless interest rates are cut.
The Bank’s next interest rates decision is set to come early next month, three weeks before Rachel Reeves’ Budget.
In public, policymakers are expected to state they will look past the effects of the Chancellor’s fiscal policy decisions when considering whether to lower interest rates.
But discussions behind closed doors may take note of the Chancellor’s ambition to lower the cost of living across the UK.
One of the policies under consideration includes stripping VAT from energy bills as Reeves doubles down curbing inflation.
Economists have widely pointed out that last year’s Budget, which included a £20bn hike to employers’ national insurance contributions (NICs), drove price growth in the UK.
The IMF and the OECD have warned that the UK faces having the highest level of inflation over the next two years.
The major forecasters have warned that higher energy and water bills have kept prices higher in the UK while the tax burden for Brits was rising higher than in other major economies.