BOE Chief Economist Says He’s Cautious On Interest Rate Cuts

(Bloomberg) -- Bank of England Chief Economist Huw Pill said he’s erring on the side of caution in deciding when to cut UK interest rates, saying officials need to remain on guard for risks that inflation persists.

Pill said the economy and price pressures have evolved roughly as he expected at the start of March. As a result, “the absence of news and the passage of time have brought a Bank Rate cut somewhat closer.”

However, he pushed back against expectations of an imminent move, saying there was “still a reasonable way to go before I am convinced that the persistent momentum in underlying inflation has stabilized.”

Pill’s comments in a speech in London come shortly before the BOE goes into silent period ahead of its next rate decision on May 9, when the bank will also publish a full forecast for inflation and growth. The central bank signaled in February that rate cuts were on the cards later in the year if inflation drops back to the 2% target das expected. 

Economists and Pill now expect a sharp drop in price pressures in April due to easing energy costs. Even so, the last readings for inflation both in the UK and US were above expectations, triggering investors around the world to pare back expectations for sharp rate cuts this year.

Traders are pricing in just two quarter-point reductions in the BOE’s base rate by the end of this year, down from five or six at the start of the 2024. Pill’s remarks contributed to that pull-back, with investors also responding to stronger-than-expected figures for the government’s deficit and borrowing. 

Pill said he remains concerned about sticky core and services inflation, which remain elevated. 

Last week, both Governor Andrew Bailey and Deputy Governor Dave Ramsden signaled they believe the time for a rate cut is closing in and that the UK can reduce rates before the US Federal Reserve. 

Speaking earlier on Tuesday, Jonathan Haskel, another of the BOE’s nine rate setters, warned that the UK labor market remained “very tight,” which he said was “central to the inflation aspect.” Haskel had been voting to raise rates until recently. 

Megan Greene, another former hawk on the Monetary Policy Committee, last week also expressed concerns that underlying inflation may be persistent.

In his appearance Tuesday, Pill also drew attention to signs that worker shortages may persist. “We focus on tightness of labor market, pay growth and services inflation,” he said. “This persistent component of inflation may still be threatening that we see a bounce back up.”

“I am erring on the side of caution with reducing the bank rate,” he said. “In my view there are greater risks associated with easing too early should inflation persist rather than easing too late should inflation abate.”

He added that the hurdle to reducing his concerns about the persistence of inflation was relatively high. While welcoming the “backdrop of declining headline inflation,” he said there had been little relevant news since he last spoke on March 1.

“This suggests little need to amend the assessment of the economic, inflation and policy outlook that I offered then.”

“I do think that the persistent component of inflation is being squeezed out of the system by restrictive monetary policy. But I don’t see reason to believe that is happening more rapidly or profoundly than I expected six months ago.”

--With assistance from Andrew Atkinson.

(Updates with comment from the speech and Q&A.)

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