The chief economist of Bank of England has warned that key inflation measures remain “uncomfortably” high. This is a blow to the hopes of households for a rate cut.
Huw Pill, a member of Threadneedle Street’s monetary committee (MPC), hinted that he would vote for a rate of 5.25% on official borrowing costs when he stated wage growth and inflation were persistent in the service sector.
In an unscripted ending to a address delivered at the Asia House thinktank, Pill stated: “I still think there’s an open question about whether it is the right time for a rate reduction.”
Pill’s remarks had an immediate effect on the financial markets. They had previously bet 60-40 for a rate reduction when the MPC met early next month, but now only see a 50-50 possibility of a change.
Pill, another member of the MPC, said earlier this week that he favoured keeping rates unchanged. Jonathan Haskell said earlier this week that he was in favour of keeping rates the same.
The MPC raised interest rates at 14 consecutive meetings between December 2021 to August 2023 from 0.1% up to the current level.
Pill said headline inflation, as measured by consumer prices index, should not be taken too seriously. It is still below the government’s target of 2%. The MPC instead focused on three indicators of inflation persistence, including tight labour markets, wage growth, and service price inflation.
He said that recent changes in the indicators had hinted at an upside risk for his assessment of inflation persistence.
Pill said that the Bank of England’s inflation target is 2%. However, a robust labour market and wage growth as well as prices in the services sector could lead to a return above this. This would be due to the cooling in energy prices that has helped lower the headline rate over the past few months.
There is a risk that the price will rise in the second half of 2014, but we are not talking about drastic changes.
Chief economist of the Bank said that it was possible to become complacent and lose sight of the goal if you focus too much on the return to 2% inflation in May. He stated that the Bank was “resolutely” focused on meeting the inflation target. “Not only today, but over time.”
When asked if this meant the Bank would be cautious in setting interest rates, Mr. Ayres replied: “I wouldn’t back too far from that.”
Pill, despite his cautious approach said that it was a question of when and not if rates would be reduced.
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