The Bank of England's chief economist Huw Pill has reiterated his stance for interest rates to be reduced at a "more cautious pace" over the coming year, heightening the prospect that Bank Rate could remain at four per cent for the foreseeable future.
During a speech on Friday, Pill described attempts to reduce inflation throughout the past year as "disappointing" whilst highlighting how taxation had contributed to rising prices, as reported by .
Inflation is projected to reach four per cent in September, with the Office for National Statistics (ONS) due to release updated figures next week.
Pill, who is broadly regarded as amongst the more hawkish figures on the Monetary Policy Committee (MPC), indicated he anticipated interest rate reductions in the coming year but acknowledged that elevated inflation in recent months had emerged as a "more pressing" concern for policymakers.
His address also made reference to his dissenting vote regarding the Bank's decision to commence its rate-cutting cycle in the middle of last year as demonstration of his relative prudence compared to his colleagues.
"Those of you with good memories will recall that I had dissented from the decision to cut Bank Rate at the August 2024 MPC meeting," Pill addressed an audience at an event organised by The Institute of Chartered Accountants in England and Wales (ICAEW). "I explained how concern about potential changes in the structure of price and wage setting in recent years might have rendered underlying º£½ÇÊÓƵ inflation more persistent than in the past, which I saw as implying ample reason for caution in assessing the inflation outlook and pointed to a need to guard against the risk of cutting rates either too far or too fast.
"Unfortunately, headline consumer price index (CPI) inflation has proved stickier than the MPC anticipated."
He outlined his ongoing concerns regarding the speed of disinflation within the º£½ÇÊÓƵ economy, citing "stickiness in services price inflation and pay dynamics", with rising wage growth driving inflation upwards throughout the past year.
An increase in food price inflation could also become "embedded" in household expectations, maintaining inflation at higher levels than desired, Pill noted.
"Despite a series of further shocks to the º£½ÇÊÓƵ economy over the past year – for example, the emergence of threats to the multilateral global trading system – the greater weight have I placed on stronger structural inflation persistence has led me to dissent from the Committee's decision on several occasions, in favour of a slower, more cautious pace of Bank Rate reduction.
"While I would expect further cuts in Bank Rate over the coming year should the economic and inflation outlook evolve broadly as the MPC expects, it will continue to be important to guard against the risk of cutting rates either too far or too fast."
November's crunch interest rates decision
Earlier this year, Pill stated in a speech that policymakers had prematurely decided to cut interest rates and had reduced them at a quicker rate than necessary to bring inflation down to the Bank's two per cent target.
His views offer a glimpse into the MPC meetings prior to significant decisions, with his hawkish stance likely to conflict with the dovish external member Alan Taylor, who has cautioned that the º£½ÇÊÓƵ economy is at risk of falling into a recession unless interest rates are reduced.
The Bank's subsequent interest rates decision is due early next month, three weeks ahead of Rachel Reeves' Budget.
Publicly, policymakers are anticipated to assert that they will disregard the effects of the Chancellor's fiscal policy decisions when deliberating whether to reduce interest rates.
However, private discussions may take into account the Chancellor's goal to decrease the cost of living across the º£½ÇÊÓƵ.
One of the policies being considered involves removing VAT from energy bills as Reeves intensifies efforts to curb inflation.
Economists have broadly highlighted that last year's Budget, which incorporated a £20bn increase to employers' national insurance contributions (NICs), spurred price growth in the º£½ÇÊÓƵ.
Both the IMF and the OECD have issued warnings that the º£½ÇÊÓƵ is on course to have the highest level of inflation over the next two years.
Leading forecasters have cautioned that elevated energy and water bills are keeping prices high in the º£½ÇÊÓƵ, whilst the tax burden for Britons is escalating more than in other major economies.
