Interest rate cuts need to slow down to curb inflation, says Huw Pill
Interest rate cuts are fuelling inflation and need to slow down, the Bank of England’s chief economist Huw Pill has warned ahead of the release of fresh data set to show a jump in price growth in April.
The Bank‘s Monetary Policy Committee (MPC) voted by a slim majority to cut interest rates to 4.25 per cent at the last monetary policy decision in early May.
But the Bank’s chief economist, who voted to hold interest rates, has called for a more “cautious” approach rather than “careful and gradual” one.
Speaking at an event hosted by Barclays, Pill said inflation had remained at above the Bank’s two per cent target because the interest rate cutting-cycle started too early while the cost of borrowing did not go high enough.
“In my view, that withdrawal of policy restriction has been running a little too fast of late, given the progress achieved thus far with returning inflation to target on a lasting basis,” he told an audience of City investors.
“As reflected in the voting record, my sense is that Bank Rate plateaued at slightly too low a level in 2023, and the MPC started cutting Bank Rate slightly too early in 2024.
“To compensate, my starting point is that the pace of Bank Rate reduction should be ‘cautious’, running slower than the 25 basis point per quarter we have implemented since last August.“
Inflation could reach as high as 3.6 per cent in April due to tax hikes and soaring energy costs, according to some City economists. re
President Trump’s tariffs prompted leading economists to suggest that there might be a sharper deceleration in price growth than expected but Pill said the effects were “more marginal” than anticipated.
Worries about global trade turmoil and lack of financial security were also making some businesses set higher prices than they otherwise might have, policymakers at the Bank have indicated.
Pill said the MPC will have to “remain alert” despite progress on trade deals struck by the US with key trading partners and a jump in stock market prices across Asia and North America.
Better judgement on interest rate cuts needed to control inflation
The Bank’s chief economist, who is viewed as one of the most hawkish members of the MPC, was one of two rate-setters to vote for interest rates to be held at the last meeting alongside external member Catherine Mann.
Before the meeting, City analysts were pricing in up to four interest rate cuts this year, which could bring interest rates down to 3.5 per cent.
But now only two further interest rates are expected to be made following the
Pill echoed fellow deputy governor Clare Lombardelli in raising concerns about high wage growth sustaining “momentum” for longer than the Bank had previously predicted, pushing up inflation.
“The MPC’s wage growth forecasts have systematically under-predicted the strength of pay growth,” he said.
He also challenged the Bank’s commitment to publishing a central forecast in its monetary policy report, claiming that providing transparency had “come at the cost of clarity”.
“There is a question about [whether] we should be more concerned about having consistency across all our analysis and trying to get that in a single framework based around the published forecast, or should we try and have deeper analysis, which may be less consistent with the forecast, that allow you to understand specific concerns that you have.”
The Bank has faced criticism over its use of language to signal policy intentions to drop inflation to its target level.
Andrew Goodwin of Oxford Economics said he was not a fan of the “word salad” provided by the Bank in phrasing its approach as “careful and gradual”.
“I don’t think it’s a particularly important or a particularly good way of signaling things,” he said.