The Bank of England’s chief economist said the base rate should not be cut “too far or too fast,” — which comes a day after the central bank governor argued it should consider a “more aggressive” position.
Huw Pill, who is also a member of the Bank’s rate-setting Monetary Policy Committee, said: “While further cuts in Bank rate remain in prospect should the economic and inflation outlook evolve broadly as expected, it will be important to guard against the risk of cutting rates either too far or too fast.”
Pill’s comments, in a speech to the Institute of Chartered Accountants for England this morning, highlight a divide inside the MPC over how tight monetary policy should remain.
Just yesterday Bank governor Andrew Bailey said there was room for the central bank to become a “bit more aggressive” on interest rates provided inflation continued to move in the right direction.
Panmure Liberum chief economist Simon French said the last 24 hours have shown “that even the internal MPC members are split on the pace of removing restrictiveness”.
But Ebury head of market strategy Matthew Ryan added: “His [Pill] communications provide an element of validation to our view that markets perhaps took Bailey’s words too literally, and as a confirmation of faster cuts ahead, rather than merely a warning that this is a possibility.”
Inflation came in at 2.2% in August, unchanged from July, just above the BoE’s 2% target.
Last month, the MPC voted to hold bank rate at 5%, following a 0.25% cut in August. Its first reduction in four years.
Pill is a hawkish member of the MPC and was one of four policymakers who opposed the rate cut in August, but were outvoted by the other five members of the committee.
Money markets are betting that the MPC will vote for 0.25% rate cuts in each of their last two meetings of the year in November and December, bringing the base rate down to 4.5%.
But Pill said this morning: “Since the MPC views services inflation, and pay growth, as more indicative of underlying inflation persistence, this represents a continued source of concern.”
Services inflation came in at 5.2% in the year to August from 5.6% the month before. Annual growth for regular earnings came in at 5.1% from May to July, according to the latest official data.
The MPC has said it wants to see both of these figures fall below 5%.
Pill pointed out, “there is ample reason for caution in assessing the dissipation of inflation persistence”.
He added: “For me, the need for such caution points to a gradual withdrawal of monetary policy restriction.”
