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The Bank of England’s chief economist has warned it has been cutting rates too quickly, and argued its policymakers should have held the level unchanged given inflationary persistence.
Huw Pill, who opposed the quarter-point reduction earlier this month to 4.25 per cent, said he had advocated policymakers “skip” reducing rates this quarter rather than “halting” the process of lowering the level altogether.
He added: “My starting point is that the pace of bank rate reduction should be ‘cautious’, running slower than the 25bp per quarter we have implemented since last August.”
The BoE’s key rate “plateaued at slightly too low a level” in 2023 when it was battling high inflation, he said, adding that the Monetary Policy Committee had started cutting the rate “slightly too early” last year.
Pill has been a consistent voice of caution as the central bank embarks on a series of rate reductions. He said that while progress of inflation back down towards the 2 per cent target was ongoing, “disinflationary momentum has shown signs of stuttering”.
In particular, the pace of declines in underlying pay growth had slowed, while core services inflation remained “obstinately robust”. Meanwhile, he was seeing renewed strength in business survey indicators, while household inflation expectations had picked up.
His comments come ahead of official UK inflation data due on Wednesday morning that is expected to show a pick-up in consumer prices inflation to 3.3 per cent in April, up from 2.6 per cent the prior month.
This all came against a background of nearly four years of above-target inflation, Pill added in a speech at an event hosted by Barclays.
He backed a scenario published by the BoE in its latest economic outlook where knock-on effects from an energy-induced jump in headline inflation led to a more sustained acceleration of price growth than the central bank was forecasting.
This could be exacerbated by weaker labour productivity growth, which weighs on supply and boosts unit labour costs.
Pill added that BoE research had pointed to particular risks when inflation reaches 3.5-4 per cent. “This can be seen as a statistical warning of another bout of potential second-round effects, especially as households may be more attentive to inflation given recent experience and more sensitive to developments in especially salient items of the CPI basket such as food and utility bills.”
He added: “In short, I remain concerned about upside risks to the achievement of the inflation target.”
Pill’s comments underscore the depth of division on the MPC in the wake of the latest bank decision.
While the majority of the group opted for a quarter-point reduction in rates to 4.25 per cent, Pill joined Catherine Mann in advocating rates be held.
A third group called for a sharper, half-point cut in rates given weak economic growth and dangers, including the global trade conflict.
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The BoE is attempting to shift its communications by deploying alternative scenarios alongside its main economic forecast. The central outlook would no longer be treated as representing the “best collective judgment” of the MPC, because the bank now recognised there was no single view across the committee, deputy governor Clare Lombardelli explained in a recent speech.
The central bank would instead move towards deploying a forecast based on an initial proposal by the BoE’s staff, which a majority of the committee agreed was a “reasonable basis for discussions”.
While the MPC’s previous focus on debating its central forecast made sense in a more “benign environment”, Pill argued, the central bank was now grappling with how to respond to bigger shocks, which should see it place greater emphasis on alternative scenarios.