The Bank of England must guard against cutting the interest rate “too far, or too fast,” to avoid higher inflation, warns the central bank’s chief economist.
Huw Pill, who also sits on the Bank’s rate-setting Monetary Policy Committee, said high services prices and wages had made inflation much more “sticky” than Bank policymakers had previously forecast.
The cost of living is currently at 3.8% and is widely expected to hit 4%, when official figures are posted next week.
This would be the highest that inflation has been this year, and double the Bank’s 2% target.
“All this supports my view that the MPC should adopt, from this point forward, a more cautious pace in withdrawing monetary policy restriction so as to ensure continuation in disinflation towards the 2% target,” said Pill at a conference in London held by the Institute of Chartered Accountants in England and Wales.
Pill, one of the more hawkish members of the MPC, added: “While I would expect further cuts in Bank rate over the coming year should the economic and inflation outlook evolve broadly as the MPC expects, it will continue to be important to guard against the risk of cutting rates either too far or too fast.”
The interest rate is currently 4%, after being cut five times since August 2024.
There is a division of opinion on the MPC over whether rising inflation is due to temporary hikes in food and energy costs, or down to longer-term services and wage costs.
But Pill believes services inflation and higher pay are to blame.
The Bank’s nine-strong MPC voted 7–2 last month to maintain Bank rate at 4%, with Alan Taylor and Swati Dhingra pressing to cut the interest rate by a quarter point to 3.75%.
Pill said: “I continue to view a decision to keep Bank rate on hold as a ‘skip rather than a halt’ in monetary policy normalisation.
“But the need to recognise the stubbornness of inflationary pressures is becoming more pressing.”
Earlier this week, Bank governor Andrew Bailey said that the latest round of labour market data backed his view that underlying inflation pressures were cooling.
Those official figures showed average wage growth was 4.7% in the three months to August, down from 4.8% over the three months to July.
The national unemployment rate rose slightly from 4.7% to 4.8%.
Money markets have brought forward their bets on when the Bank is likely to cut rates again to February from April.
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