Future UK Rate Decisions ‘Finely Balanced,’ BOE’s Pill Says

Bank of England Chief Economist Huw Pill said interest-rate decisions are becoming “finely balanced” and officials may have already “done enough.”

(Bloomberg) — Bank of England Chief Economist Huw Pill said interest-rate decisions are becoming “finely balanced” and officials may have already “done enough.”

Speaking at the Marrakesh Economic Festival in Morocco, Pill said inflation “remains too high” but there is “still a lot” of monetary tightening that has yet to take effect after 14 successive rate increases since the end of 2021.

The BOE halted its most aggressive rate rise cycle since the 1980s last month, choosing to hold rates at 5.25% amid signs that inflation is coming under control. 

The nine-member Monetary Policy Committee was split over the decision, with four pressing for another rate rise. Pill voted to hold. Money markets are evenly priced for one more quarter-point hike before the cycle ends.

“UK inflation has been too high, it remains too high. We need to return it to target, so we have tightened monetary policy,” Pill said.

“We have done a lot over the last two years. A lot of our policy is still to come through. There is still policy transmission in the pipeline. Whether we’ve done enough or whether we have more to do, I think is becoming a more finely balanced issue. But we will do what we need to do in order to have inflation at 2% on a lasting basis.”

Pill also hinted that the UK economy may be heading for a slowdown. Households have now “used up” the excess savings stockpiled during the pandemic and are struggling. Government programs to help households with energy costs have propped up the economy while consumer spending has remained weak.

That weak household demand may now be made worse by high interest rates, he said. “Are we now moving with higher interest rates with a less favorable overall demand prospect in a different direction? So that is a key area of concern or focus of our analysis.”

He stressed that the 2% inflation target remains key: “It’s absolutely crucial that we reinforce the 2% anchor.”

Officials are closely watching indicators of inflation persistence, including services inflation, wage development and the tightness of the labor market, he said.

Investors are expecting rates to remain at elevated levels for a while, a path Pill appeared to endorse.

“We are not done, it is premature in my view to talk about the unwinding. We are still in a phase of ensuring inflation goes back to 2% and we should not be deflected from that,” he said.

“We have become a bit oversensitive or perceived as oversensitive to very short-term developments in the data. If the concern is about some self-sustaining momentum there is going to be a need to a address that persistence, and a persistence in the policy response to it. The idea that policy response or stance will turn on a sixpence is overdrawn.”


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