Huw Pill, chief economist at the Bank of England, voted to hold interest rates at 3.75pc at February’s meeting of the Monetary Policy Committee – Graeme Sloan/Bloomberg
The Bank of England made an “error” by cutting interest rates too far and too fast, its chief economist has said.
Huw Pill said inflation had not fallen as much as officials expected when they began cutting rates 18 months ago. He suggested the Bank’s aggressive rate cuts may have led to higher price rises than otherwise.
“Maybe we have already made the policy error,” he said. “The persistence of inflation can be driven by our policy decisions.”
The admission of a mistake from a senior official comes just weeks after the Bank said its forecasts for inflation and wage growth had been wrong for years.
Projections “proved repeatedly too low” since 2022, officials said in their first ever forecast evaluation report.
Mr Pill’s comments will put further pressure on Andrew Bailey, the Bank’s Governor, who has faced criticism after the Bank persistently underestimated inflation during the cost of living crisis.
Inflation ran away from the Bank in 2021, reaching a peak of 11.1pc in October 2022, its highest level since the early 1980s.
Interest rates peaked at 5.25pc in 2023 before the Bank began lowering borrowing costs in August 2024. The Bank’s Monetary Policy Committee (MPC), of which Mr Pill is a member, has since cut interest rates six times to take the base rate to 3.75pc.
However, progress has stalled over the last year and and the Bank Rate currently stands at 3.4pc, still well above the Bank’s 2pc target.
Mr Pill said: “We should have been setting policy through the middle of 2024 to get underlying inflation at 2pc in the middle of 2026. On our current forecast, we will not have achieved that.
“Headline inflation, excluding Budget measures, will be running at 2.5pc. Lots of progress has been made, but it is not 2pc.”
The chief economist has regularly argued for higher interest rates, repeatedly voting against the majority of the nine members of the MPC.
Mr Pill was one of five members of the committee who voted to hold interest rates at 3.75pc at February’s meeting, narrowly outnumbering the four who backed a rate cut. Mr Bailey held the casting vote.
Speaking at a Santander conference, Mr Pill said: “Do I think interest rates should be where they are now? On balance, I think they are a little bit too low.
“Does that mean next time I should be voting to hike them? You can always choose to hold them there, and as long as you are restrictive, there is a sort of substitutability between hiking rates back … or becoming more cautious.
“Holding at this level and being more cautious will be enough.”
The Bank of England expects inflation to fall to 2pc in the coming months, aided by measures to cut energy bills announced by Rachel Reeves in the November Budget.