Interest rates are falling too fast, the Bank of England’s chief economist has warned, sparking fears about its ability to keep inflation down.
Huw Pill said quarterly cuts of 0.25 percentage points since last summer were “too rapid” and instead called for more “cautious and gradual” reductions.
The top economist said changes in how prices and wages are set – with workers demanding higher pay and companies keeping prices higher for longer – “have increased the intrinsic persistence of the UK inflation process”.
“That not only makes inflation ‘higher-for-longer’ in the aftermath of pandemic and invasion-induced inflationary shocks than would otherwise have been the case,” Mr Pill warned.
It also means the Bank of England’s base rate should be kept higher for longer “in pursuit of lasting achievement of the 2 per cent inflation target”, he added.
Any slowdown in the Bank of England’s rate cuts would be a blow to Sir Keir Starmer and Rachel Reeves, who have touted the reductions so far as evidence Labour’s policies are boosting the economy.
At the central bank’s last monetary policy meeting, Mr Pill dissented and voted to hold interest rates steady, while other members of its rate-setting committee voted to cut the base rate by 0.25 per cent to 4.25 per cent.
It came after a slowdown in inflation in recent months, with inflation having fallen to 3.4 per cent in March, from a peak of 9.6 per cent in October 2022.
In his speech, Mr Pill said progress continues towards the Bank of England’s target 2 per cent inflation rate, with further easing of interest rates justified.
But he called for a “skip” in the quarterly reductions of interest rates, warning that the pace of easing since last summer “is too rapid given the balance of risks to price stability we face”.
He added: “I would therefore characterise my dissenting vote as favouring a ‘skip’ in the quarterly pattern of Bank Rate cuts intended to slow the pace at which monetary restriction is withdrawn.
“It should not be seen as favouring a halt to (still less a reversal of) that withdrawal of restriction.”
The Bank of England’s cuts have been a boost to mortgage holders and first-time buyers, with sky-high mortgage rates coming down as a result.
Average five-year fixed residential mortgages are charging 5.07 per cent interest, Moneyfacts data shows, compared with 5.9 per cent a year ago.
After the Bank of England’s last rate cut, governor Andrew Bailey said: “Inflationary pressures have continued to ease, so we’ve been able to cut rates again today.”
The Bank has also predicted it will cut interest rates at a faster rate than previously expected, amid the backdrop of potentially shallower inflation and slower growth next year.
It has said interest rates are predicted to fall as low as 3.5 per cent by the second quarter of next year, indicating a further three cuts by rate-setters.
