Interest rates falling 'too rapidly' warns Bank of England chief economist

The chief economist of the Bank of England has warned interest rates have been falling too quickly as the rate of inflation continues to exceed the bank’s 2 per cent target.

Huw Pill said rate cuts have been ‘too rapid’ since August last year, in which time base rate has fallen from 5.25 to 4.25 per cent despite the consumer price index registering above 2 per cent in all but one month over the period.

Pill was outvoted by fellow monetary policy committee members earlier this month when he called for base rate to stay at 4.5 per cent, while two policymakers backed a 50 basis point reduction to 4 per cent.

He told an event held at Barclays in London that progress of ‘disinflation’ was partly a signal that easing monetary policy – meaning rates coming down – was working.

He added: ‘And in my view, that withdrawal of policy restriction has been running a little too fast of late, given the progress achieved thus far with returning inflation to target on a lasting basis.’

‘I remain concerned about upside risks to the achievement of the inflation target.’

Tomorrow, the Office for National Statistics will publish inflation data for April, when households across Britain were saddled with bill hikes, many businesses saw increased labour costs and US tariffs came into force.

Consumer price inflation is expected to have risen again to 3 per cent from 2.6 per cent in March.

Pill said his vote to hold interest rates earlier this month was more of a ‘skip’ than a ‘halt’ in rate cuts.

This reflects his view that the ‘pace of bank rate reduction should be cautious, running slower than the 25bp (basis points) per quarter we have implemented since last August’, the economist added.

‘That requires a ‘skip’ in that quarterly pattern at some point. And I decided that the May meeting was an appropriate moment for that ‘skip’.

Pill stressed that he was concerned about inflation persistence – meaning price rises remaining elevated – which would mean ‘you need to run the economy a little bit cooler’.

‘That’s an uncomfortable message, but it may be an important message for policymakers with inflation targets to normalise,’ he said.

‘I do worry about the fact that inflation has stayed stubbornly high, and pay dynamics have stayed stubbornly strong, even as activity has been relatively disappointing… over the last two to three years.

‘So that’s what I worry about… and I think that does influence the way I vote in the committee as an individual.’