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The Bank of England should be wary of cutting rates too soon after years of above-target inflation, a senior policymaker has warned, as he reiterated the need for “restrictive” monetary policy.
The pound rose against the dollar after Huw Pill, the BoE’s chief economist, said that falls in headline inflation were not enough reason to ease policy, though a reduction in interest rates from 5.25 per cent was “somewhat closer”.
“After several years of above-target inflation rates and given the threat of persistent inflation dynamics becoming embedded in expectations, in my view there are greater risks associated with easing too early should inflation persist rather than easing too late should inflation abate,” Pill said on Tuesday.
“This assessment further supports my relatively cautious approach to starting to reduce Bank Rate.”
Pill’s words suggest he is not yet ready to vote for a reduction in interest rates as the Monetary Policy Committee prepares to meet on May 9. His assessment of inflation risks contrasted with Sir Dave Ramsden, BoE deputy governor, who said last week that inflation could hold around the bank’s 2 per cent target for the next three years.
The pound traded 0.4 per cent higher against the US dollar at $1.24.
Senior BoE officials including Ramsden and BoE governor Andrew Bailey have in recent days struck an optimistic note about the battle against inflation as price growth falls to 3.2 per cent in March — far below the double-digit levels inflation hit in mid-2022.
Bailey said last week that the latest inflation data was “pretty much on track” with the central bank’s February forecasts as he insisted there was less “demand-led” inflation in the UK than in the US.
In a speech hosted by the London campus of Chicago Booth School of Business, Pill said he believed there had been “little news” in recent months on inflation.
“We are now seeing signs of a downward shift in the persistent component of inflation dynamics,” he said, in a reference to services price inflation, pay growth, and the tightness of the UK labour market.
“But we still have a reasonable way to go before I am convinced that the persistent momentum in underlying inflation has stabilised at rates consistent with achievement of the 2 per cent inflation target on a sustainable basis.”
Official figures last week showed that while headline inflation retreated somewhat in March, annual growth in the price of services slowed less than expected, from 6.1 per cent to 6 per cent.
Declines in closely watched indicators that pointed to persistent inflation had been “tentative”, said Pill, adding that the MPC still needed to maintain restrictive monetary policy. A cut in the key rate of interest would not entirely undo that restrictive stance of policy given where rates stood, he added.
This suggests that Pill sees scope to modestly reduce rates while still keeping downward pressure on inflation. But his comments indicated that the time was not yet ripe for an initial move.
Recalling a speech he gave in Cardiff in March, Pill said that his “baseline scenario” then had been that the time for cutting the BoE’s key rate remained “some way off.”
“Taken together, the absence of news and the passage of time have brought a Bank Rate cut somewhat closer,” Pill said on Tuesday. “But the same absence of news gives me no reason to depart from the baseline that I established in Cardiff.”
Source: Economy - ft.com
