By Chris Dorrell
Huw Pill, chief economist at the Bank of England, said there was still “some work to do” on ensuring inflation gets back to two per cent sustainably, but said a summer rate cut was “not unreasonable”.
Speaking at an event run by the Institute of Chartered Accountants in England and Wales (ICAEW), Pill stressed that the Bank’s focus would be on the persistent components of inflation in the weeks ahead.
“Inflation will get back to target in the next few months…But I think the key question is: is this domestically driven persistent component (of inflation)…now consistent with the two per cent target.”
“We are beginning to see strong evidence that it is indeed coming down…but it is still running at levels that indicate we have some way to go,” he said.
He argued that much of the decline in inflation, which has fallen from over 11 per cent in autumn 2022 to just 3.2 per cent in March, was driven by “developments outside the UK”.
Indicators of domestic price pressures, such as services inflation and wage growth, remain too high for the Bank to be confident that inflation will fall to target sustainably, he cautioned.
When asked why the Bank did not cut rates last week even though its forecasts suggested inflation would be below two per cent at the end of its forecast, Pill stressed restrictive policy was a key reason why inflation is forecast to fall.
“The reason why the domestically generated component of inflation is going down is because we have a restrictive policy,” he said.
The Bank’s forecasts, which rely on market expectations, suggest inflation will go below two per cent in two years. While Pill said this implied interest rates need to be a bit lower across the period than markets expect, “it doesn’t mean that Bank Rate needs to be cut today”.
However, if more data comes in which points to continuing progress on the domestic components of inflation, Pill said it was “not unreasonable to believe that through the summer…Bank Rate will come under consideration”.
He stressed that a single cut to Bank Rate would still leave policy in restrictive territory.
Markets are more or less certain that the Bank of England will cut interest rates this summer, but are unsure whether it’ll be June or August.
Policymakers will receive two sets of inflation figures between now and the June decision as well as one more labour market release.
New figures on the labour market were released this morning which showed that wage growth remained high in the first three months of the year while unemployment rose.
Pill said the figures were “consistent with a small additional decline” in wage growth but said the labour market “remains pretty tight by historical standards.”
