Inflation pressures strengthen the case for a cautious approach, says Pill
The Bank of England’s chief economist Huw Pill urged decisionmakers to take a conservative approach to interest rate cuts in the months ahead, a day after an influential central bank official warned sticky inflation showed little signs of easing.
Pill told an audience in Washington that borrowing costs were likely to move lower over the next 12 months – but that “it will continue to be important to guard against the risk of cutting rates either too far or too fast.”
Stubborn inflationary pressures are the main reason the Bank will need to be cautious in the coming months, Pill said, echoing claims by policymaker Catherine Mann on Thursday that there was “very clear upside evidence” inflation would stick above the central bank’s 2% target for a longer period.
“I call it persistently persistent,” Mann said at an Institute of International Finance event in Washington, “and that is the principal challenge facing me as a monetary policymaker.”
Those pressures are continuing despite sluggish economic growth and a mixed outlook for the jobs market, Mann said, meaning getting inflation under control should remain the BoE’s top priority.
The comments highlight something of a growing divide between BoE members on the best path forward.
Earlier this week, Alan Taylor – an external member of the central bank’s Monetary Policy Committee – underlined the risk of a “bumpy landing” for the UK economy and suggested the Bank’s approach to rates may have been too conservative.
“By maintaining what I think is a too restrictive path of interest rates, we may have braked too hard, such that inflation cannot smoothly return to target with the economy close to potential,” he said.
But Pill said on Friday that the current level of inflation was “disappointing” and urged the central bank to adopt “a more cautious pace in withdrawing monetary policy restriction so as to ensure continuation in disinflation towards the 2% target.”
That wouldn’t mean scrapping rate cuts entirely, he said, but rather holding rates steady in at least some of its forthcoming decisions.
That’s a more dovish approach than the case made by Monetary Policy Committee member Megan Greene earlier this week for rates to remain unchanged until at least March of next year to get inflation under control.
While the central bank has moved rates steadily lower since the third quarter of last year, financial markets see little to no chance that it will cut again at its next meeting, scheduled for November 6.
