Bank of England Chief Economist Huw Pill has cautioned that interest rate reductions are happening “too rapidly,” as inflation remains stubbornly above the central bank’s 2% target. Despite recent cuts, Pill argues that easing monetary policy too quickly risks undermining efforts to stabilize prices in the long term.
Key Takeaways:
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Interest rates have fallen from 5.25% to 4.25% since August 2023, despite inflation staying above target.
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Pill voted to hold rates at 4.5% in May, while two MPC members pushed for a deeper cut to 4%.
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April inflation data (due tomorrow) is expected to rise to 3%, up from 2.6% in March.
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Pill warns of “upside risks” to inflation, citing persistent price pressures and strong wage growth.
Why Are Rate Cuts Happening Too Fast?
Pill expressed concerns that the pace of disinflation (falling inflation) may be misleading policymakers. While lower rates can stimulate economic growth, cutting them too aggressively could allow inflation to rebound.
“The withdrawal of policy restriction has been running a little too fast,” Pill stated at a Barclays event in London. “I remain concerned about upside risks to achieving the inflation target on a lasting basis.”
Inflation Risks Persist
The UK economy faces multiple inflationary pressures, including:
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Rising household bills (energy, water, broadband)
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Increased labor costs for businesses
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New US tariffs impacting import prices
Pill emphasized that persistent inflation requires a “cautious” approach to rate cuts, suggesting slower reductions than the current 25 basis points per quarter.
What Does This Mean for Future Rate Decisions?
Pill described his recent vote to hold rates as a “skip” rather than a “halt,” signaling that future cuts should be more measured. He warned that keeping inflation in check may require keeping the economy “a little bit cooler”—meaning higher rates for longer.
“I worry that inflation has stayed stubbornly high, and pay growth remains strong, even as economic activity disappoints,” he said. “This influences how I vote on the Monetary Policy Committee.”
What’s Next?
With April’s inflation figures due tomorrow, economists will watch closely to see if price pressures are easing or if the Bank of England needs to delay further rate cuts. For now, Pill’s warnings suggest that borrowers and businesses should not expect steep rate reductions in the near term.
