Bank of England chief economist dampens summer interest rate cut hopes

After the Bank of England chief economist warned against reducing interest rates too early and said that inflation had to be squeezed from the economy, the prospects of an interest rate cut this summer have diminished.

Huw Pill expressed concern that, after a survey indicated strong sales in the private sector during the past month, and the London Stock Exchange rose to record highs, inflation could rebound with the strengthening of the economy.

Pill, speaking in London said: “We have a long way to go until I am confident that the persistent momentum of underlying inflation rates has stabilized at rates compatible with achieving the 2% target on a sustained basis.”

He said: “[It] [is] necessary to squeeze out the persistent component (of inflation) from the system.

The financial markets have retreated from their expectations that the Bank will start cutting interest rates this September. Investors had earlier in the day bet on a reduction in interest rates to 5.25% in August.

His comments coincided with a closely-watched survey of business activity conducted by S&P Global, which showed that the services sector was performing well and there had been an increase in hiring. This is a sign that businesses are heading into summer in a positive mood.

The flash UK PMI, which includes the manufacturing and service sectors, increased to 54 in April from 52.8 the month before. A figure higher than 50 indicates an expansion.

Pill’s warning about inflation came shortly after the FTSE 100 reached a record-high of 8,076. This was driven by hopes that UK would cut rates earlier than the US and relief that Middle East Crisis has not escalated.

The London stock market fell back to 8,044 after Pill’s warning of possible rate delays.

Jonathan Haskel, who is seated with Pill in the Bank’s nine member monetary policy committee on Tuesday, said at an event separate in London that the UK recovery could delay the first rate cut from the central bank.

Haskel, who took a stance in contrast to several other bank officials at the time, said that more weakness on Britain’s labor market would be needed before he could confidently predict that inflation will remain at 2%.

Haskel, at City University of London’s Bayes Business School in a seminar on inflation, said that the labour market was central to it. When asked if inflation could hold at 2% or rise this year, Haskel replied: “The labor market is central.”

He said that while the number of jobs vacancies has decreased, unemployment has increased. This shows a weakening labour market, but it is unclear whether it will weaken quickly enough to maintain inflation at target.

Haskel stated that “reasonable people could reasonably disagree on the risks.”

Sir Dave Ramsden said last week that he believed inflation could stay near 2%. The inflation rate is now 3.2%.

The increase in private sector activities above City economists’ estimates is a double edged sword for Jeremy Hunt,, who would like interest rates to come down in an electoral year.

Hunt will be disappointed by Bank of England’s stance that modest growth can be considered inflationary, and therefore interest rates are only moderately reduced this year.

Chris Williamson is the chief business analyst at S&P Global Market Intelligence. He said that the UK recession of the second half last year has been left behind. Growth, however, remained modest.

He added that “early PMI survey results for April indicate the UK’s economy continued to recover from recession last years.”

The Gross Domestic Product (GDP) has increased at a rate of 0.4% quarterly after a 0.3% increase in the first quarter.

The UK’s economy is expected to be confirmed as no longer being in recession when official figures covering the GDP for January-March are released next month.

Initial estimates indicated that the economy contracted slightly in the third quarter and the fourth quarter of 2023. This indicates a technical recession.

S&P surveys on business activity in the eurozone gave positive economic signals.

In April, Germany returned to growth and France was close to ending its contraction period, while the majority of the economies within the 20-member bloc experienced strong growth, providing the largest boost to the growth rate in almost a full year.

The HCOB Flash composite PMI for the eurozone reached a new 11-month high, at 51.4. This is up from 50.3 in March, a higher level that indicates more rapid growth.