Huw Pill says Bank of England needs to ‘maintain restrictive stance’ amid debate about rate cuts
Huw Pill stressed that interest rates needed to be kept at their current restrictive level for an extended period of time as traders guess at the future path of interest rates.
Speaking at an event hosted by the Institute of Chartered Accountants in England and Wales, the Bank of England’s chief economist said the central bank’s latest round of forecasts imply “more persistence” in inflation than previously expected.
This means “there’s a need for more persistence in the restrictiveness of policy to weigh against that persistence in inflation,” Pill said.
Although inflation has fallen from its peak of over 11 per cent in October, it remains at 6.7 per cent. The Bank of England forecasts that it won’t fall to the target until the end of 2025, largely because of a tight labour market.
Pill warned that many of the Bank’s preferred indicators of domestic inflation — including wage growth and services inflation — were too high to be consistent with meeting the two per cent inflation target.
In fact, he said: “There is no sign yet of a decisive turn in domestically driven services price inflation.”
However, Pill noted that inflation was coming down, partly because of the impact of monetary policy. Interest rates have been raised to a post-financial crisis high of 5.25 per cent in response to the post-pandemic surge in inflation.
“Maintaining the restrictive stance of monetary policy, which continues the pressure downward on inflation, is key to achieving the inflation target,” he said, pointing out that the basis for the Bank’s forecast has interest rates broadly flat for the next year.
The comments come as markets attempt to gauge when central banks will begin to cut interest rates.
Pill and Andrew Bailey appeared to disagree on the timing of the first-rate cut this week. While Pill suggested the market’s expectations for rate cuts next summer were not “totally unreasonable”, Bailey said it was “really too early” to discuss rate cuts.
Pill’s comments today were more hawkish than earlier in the week.
Across this week, central bankers have been pushing back against market expectations that rate cuts will begin next summer.
Bundesbank President Joachim Nagel said: “I don’t like this discussion going on about when will be the point you lower interest rates.” Central Bank of Ireland’s Governor Makhlouf, also said it was “far too early” to cut rates.
Even the expectation of rate cuts can lower longer-term borrowing costs, putting upward pressure on inflation again.