Summary:
Huw Pill, the Bank of England’s chief economist, warns against cutting interest rates “too far or too fast” to prevent higher inflation. Pill, a member of the Monetary Policy Committee (MPC), attributes persistent inflation to high services prices and wage pressures, which have made inflation more “sticky” than anticipated. With inflation expected to rise to 4%, double the Bank’s 2% target, Pill advocates for a cautious approach to monetary policy adjustments. His remarks highlight the ongoing debate within the MPC about the drivers of inflation and the appropriate pace of rate cuts.
What This Means for You:
- Monitor borrowing costs: Interest rate decisions directly impact mortgages, loans, and savings, so plan your finances accordingly.
- Inflation impact: Rising inflation could stretch household budgets further, especially for essentials like food and energy.
- Prepare for volatility: Economic uncertainty may lead to market fluctuations; consider reviewing your investment strategy.
- Future outlook: Expect cautious rate cuts in 2024, but remain alert to potential inflationary spikes.
Original Post:
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.
Extra Information:
Bank of England Monetary Policy: Learn more about the MPC’s role in setting interest rates. ONS Inflation Statistics: Access the latest official inflation data for the UK. Institute of Chartered Accountants in England and Wales: Explore insights from the conference where Huw Pill spoke.
People Also Ask About:
- What causes inflation? Inflation is driven by factors like rising wages, higher production costs, and increased demand for goods and services.
- How do interest rates affect inflation? Higher rates can curb inflation by reducing spending, while lower rates may stimulate it by encouraging borrowing.
- What is the Bank of England’s inflation target? The Bank aims to keep inflation at 2% to maintain economic stability.
- Who sets UK interest rates? The Monetary Policy Committee (MPC) of the Bank of England decides on interest rate changes.
- How does inflation impact savings? High inflation can erode the real value of savings over time.
Expert Opinion:
Huw Pill’s cautious stance underscores the need for vigilance in monetary policy amid persistent inflationary pressures. The divergence within the MPC highlights the complexity of balancing economic growth with inflation control. As global economic uncertainties persist, the Bank’s approach in 2024 will be critical to ensuring long-term stability.
Key Terms:
- Bank of England interest rates
- Monetary Policy Committee decisions
- UK inflation trends 2024
- Impact of wage growth on inflation
- Services inflation in the UK
- Economic policy and inflation control
- Future of UK monetary policy
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