Households’ hopes of a cut in interest rates have received a setback after the chief economist of the Bank of England warned that key measures of inflation remained “uncomfortably high”.
Huw Pill, one of the nine members of Threadneedle Street’s monetary policy committee (MPC), strongly hinted he would vote to keep official borrowing costs at 5.25% when he said wage growth and inflation in the services sector were proving persistent.
“I think it’s still an open question on whether the timing for a rate cut is now,” Pill said in an unscripted conclusion of a speech to the Asia House thinktank in London.
Pill’s comments had an immediate impact in the financial markets, which had been betting 60-40 in favour of a rate cut when the MPC meets early next month but now see only a 50-50 chance of a move.
Pill was among the majority when the MPC voted 7-2 at its last meeting in late June to keep borrowing costs at 5.25%, but is seen by the market as less hardline than some of his colleagues and a potential swing voter. Jonathan Haskell, another member of the MPC, said earlier this week that he favoured keeping rates unchanged.
Interest rates were raised at 14 successive meetings of the MPC between December 2021 and August 2023, taking them from 0.1% to their current level.
Pill said not too much should be read into headline inflation – as measured by the consumer prices index – falling back to the government’s 2% target. Instead, the MPC was focused on three measures of inflation persistence: labour market tightness, pay growth and services price inflation.
“On the basis of recent out turns, at the margin recent developments in these indicators have hinted towards some upside risk to my assessment of inflation persistence,” he said.
Pill added that there was a risk that inflation would return above the Bank’s 2% target as a strong labour market, resilient wage growth, and prices in the service sector offset cooling energy prices, which have helped to cut the headline rate in recent months.
“There is a threat to go higher through the second half of this year, [but] we’re not talking about dramatic changes.”
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The Bank’s chief economist said there was a danger that focusing too much on the return of inflation to the 2% target in May could lead to “complacency, maybe taking your eye off the ball”. He said the Bank would be “resolute” in focusing on hitting the inflation target. “Not just today but through time.”
Asked whether this suggested the Bank would take a cautious approach to setting interest rates, he said: “I wouldn’t back away too much from that.”
Despite his cautious approach, Pill said it was still a matter of when, not if, rates would be cut.