In an online forum on Monday (5 February), Pill said key inflation indicators were not yet at a level that would allow policymakers to start easing policy, but argued he did not need to see underlying inflation reach its 2% target to begin cutting rates.
“We do not need to see inflation get back to 2% on an underlying basis in order to begin to reduce the bank rate because we are at a restrictive level. We can reduce the bank rate a little bit and monetary policy would still be restrictive,” he said.
Bank of England holds at 5.25% and predicts higher rates into 2027
The chief economist said lower rates are a “reward” to the economy for “better inflation performance”.
“It is the focus on when, rather than if, I think, that has been what the governor has tried to focus on,” he added.
Pill said it would be “premature” to discuss rate cuts, but he added that as underlying domestic inflationary pressures ease, “we can begin to reduce bank rate”.
According to a Bloomberg report, the Bank of England is now paying closer attention to the labour market and services prices, alongside watching events in the Middle East for potential inflationary threats.
“On balance, over the next year or 18 months, because of events in the Middle East, we think that it is slightly more likely that inflation will surprise on the upside than the downside and, other things equal, that is the reason to maintain restriction in the economy for some time,” he said.
“If we were to see high energy prices leading to second round effects that boost the underlying component of domestic inflation, maybe that would be a reason to add more restriction into the monetary policy stance, either by raising bank rate – that would not be my expectation but it is possible – or maintaining the current level of bank rate for longer.”
OECD projects UK to suffer highest inflation rate among G7 economies
Pill was one of the six members of the MPC who decided last week to maintain interest rates at 5.25%. Meanwhile, two committee members voted for a hike, and another member favoured a cut.
On Monday, the OECD said monetary policy stance should remain “restrictive” in most major economies for “some time to come”, as it projected the UK to have the highest inflation rate among G7 economies in 2024 and 2025.
The Paris-based organisation said that lower inflation in the US will allow interest rates to ease, but warned the UK would suffer the G7’s highest inflation rate, at 2.8% this year and 2.4% in 2025.
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