Bank of England chief economist warns against cutting rates too quickly

Interest rates must fall gradually and stay higher over the long run to treat stubborn inflation, the Bank of England’s chief economist said, suggesting growing disagreement among the central bank’s ratesetters.
Huw Pill said he expected the UK economy to undergo a “virtuous cycle” of stabilising inflation over the coming year but he added, in a speech at the Institute of Chartered Accountants in England and Wales (ICAEW), that this dynamic “relies on the maintenance of a restrictive monetary policy stance to bear down on inflationary pressures”.
He went on: “Bank rate will need to fall over time but at a pace that ensures sufficient restriction is maintained in the transition for UK inflation to reach target in a lasting and sustained manner, not just fleetingly or in passing.”
He said there was a risk of “deeper structural changes in the UK economy that threaten to impart a more lasting inflationary dynamic” that would require an “equally lasting monetary policy response necessary to return inflation to target and keep it there”.
The Bank of England’s assumed level of neutral interest rates, which neither restrict growth or ignite inflation, was too low, he said.
The comments are at odds with remarks made by Andrew Bailey, the governor, to The Guardian with which he opened the door to the central bank’s ratesetting committee being a “bit more aggressive” in loosening policy provided inflation continued to recede.
Bailey’s comments led to the pound registering one of its largest one-day falls against the dollar since it hit a record low in the aftermath of Liz Truss’s mini-budget in September 2022. After Pill’s remarks, sterling strengthened by 0.26 per cent to $1.3157 and by 0.28 per cent against the euro to €1.1931.
Pill said he remained “concerned about the possibility of structural changes sustaining more lasting inflationary pressures”. Inflation has fallen from a peak of 11.1 per cent in October 2022 to 2.2 per cent, within a whisker of the Bank of England’s 2 per cent target.
Since the Bank of England was made independent more than twenty years ago, the views of the chief economist and the governor, which rarely diverge from each other, have been seen as a gauge of what the monetary policy committee (MPC) will do with interest rates. Contrasting opinions on the persistence of inflation and how quickly borrowing costs should fall indicates that upcoming MPC votes will be tightly contested. Bailey voted to cut borrowing costs by 25 basis points at the August meeting, the first reduction since March 2020, but Pill wanted to leave them unchanged in a 5-4 vote in favour of the reduction. Both voted to hold rates at the last meeting in September.
Although the MPC voted 8-1 in favour of holding rates last month, there was a “range of views” on the panel over the stubbornness of inflation, according to the meeting minutes. Some committee members are worried that wage growth and services prices remain too high, which Pill reiterated in his ICAEW speech; others are less convinced about the risk of inflation exceeding the 2 per cent target over the long term.
Traders in financial markets now expect the MPC to lower rates by a quarter point at both the November and December meetings following Bailey’s comments on Thursday, taking them down to 4.5 per cent from 5 per cent presently.
Analysts at the investment bank RBC Capital Markets think that the MPC could loosen policy at each meeting between November and May.