By David Milliken and Kylie MacLellan
LONDON (Reuters) – Bank of England Chief Economist Huw Pill said on Thursday that it was essential interest rates stay at their current level in order to tame inflation, in a shift in tone from earlier in the week when he discussed possible cuts next year.
Last week, the BoE kept its main interest rate at 5.25% and said rates would need to stay there for an extended period, but Pill said on Monday that market pricing pointing towards a first rate cut in August 2024 “doesn’t seem totally unreasonable”.
British consumer price inflation was the highest among large advanced economies in September at 6.7% and, although the BoE expects a big drop in October data next week, it forecasts it will take another two years for it to return to its 2% target.
“We do seem to have persistence there,” Pill said in a presentation to the Institute of Chartered Accountants in England and Wales (ICAEW).
“That’s what, for me, makes it crucial that the restrictive stance of monetary policy, as reflected in Bank Rate being at 5.25%, that that restrictive response also has to be persistent, in order to squeeze the inflationary situation out of the system,” he added.
Despite a slowdown in growth over the past three months, some domestic inflation pressures such as rapid private-sector wage growth had not yet eased, raising concerns about the medium-term outlook for inflation, Pill said.
Pill said he did not think a further rate rise was necessary, but noted the BoE’s forecasts for inflation returning to target were based on market pricing in the run-up to last week’s decision that interest rates would remain high.
These forecasts assumed an average interest rate of 5.1% in the final quarter of 2023 – indicating a possible quarter-point cut then – and rates at 4.5% in late 2025.
After Pill’s remarks on Monday, interest rate sensitive two-year gilt yields fell sharply to a five-month low and rate futures priced in a greater than 50% chance of a rate cut by June 2024, and rates falling to 4.75% by the end of next year.
BoE Governor Andrew Bailey reiterated on Wednesday that it was too soon to take about rate cuts.
Two-year gilt yields rose as Pill spoke on Thursday and rate futures scaled back pricing for a June rate cut, although they still price in at least two quarter-point cuts for next year.
Pill also said it was wrong to view central bank comments on the outlook for monetary policy as expressing firm commitments, rather than plausible scenarios.
“There’s no promise here and we are responsive to events. Events in the Middle East are a clear focus at the moment for reasons that I think are obvious,” he said.
(Writing by David Milliken; editing by William James and Alex Richardson)