(Bloomberg) -- Bank of England Chief Economist Huw Pill warned against anticipating further interest rate reductions soon, saying efforts to contain inflation aren’t yet finished and there’s evidence that companies are still driving up prices.
The official who sits on the nine-member Monetary Policy Committee voted against yesterday’s quarter-point reduction in the key lending rate to 5%. He said the UK has “made progress” on reducing inflation, but “it’s not yet job done.”
The remarks underscore a 5-4 division on the MPC about the first easing of policy since the pandemic. While inflation, which reached double digits in 2022 and 2023, is back at the 2% target, the central bank is anticipating a further increase this year and sees some sectors of the economy potentially feeding higher prices.
Pill said the UK is still seeing persistent price pressures across the services sector. He said he’s seen evidence of “second round” inflationary effects in corporate behavior on setting prices, wages and margins.
“There are some sorts of dynamics in the UK economy, a small persistent component that we need to be cautious about,” Pill said in a briefing for the BOE’s regional agents on Friday. “I think we shouldn’t be yet promising on rates are going to move down further in the very short term.”
The chief economist’s dissent placed him in opposition to Governor Andrew Bailey, who cast the deciding vote in favor of a reduction at the meeting that concluded on Aug. 1. Pill sided with the four-person minority that’s concerned about sticky price readings and structural changes in the UK labor market, where a shortage of workers has driven up wages. The five-member majority hold the view that price pressures are receding.
Policymakers will see two more batches of inflation data before their next meeting on Sept. 19. The UK’s headline Consumer Prices Index has hit the BOE’s 2% target for two consecutive months, but services inflation remains hotter than expected.
Pill pointed to stronger-than-expected wage growth as key to his decision to vote for a hold. Rising inactivity and foreign workers leaving the UK after Brexit are pushing up wages, as firms have to compete for a smaller pool of talent. Productivity remains sluggish making it difficult to raise pay without stoking up inflation.
“Something has changed in the labor market in the UK economy and the wage and price-setting process,” Pill said, adding that means inflationary pressures are becoming more persistent. This spurs “concerns that it may be a need to keep some restriction in the system somewhat longer from the monetary policy side.”
Pill also said:
- “We are not yet comfortable that we are out of the woods in managing the inflationary pressures that emerged with the pandemic with the invasion (of Ukraine), and have been perpetuated by the tightness in the UK labor market, amongst other things. But we do think we are making progress.”
- “That progress allows us to reduce the level of restriction required, because as inflation comes down, and as we become more confident, that the self sustaining virtuous cycle is taken cold, and the risk of being in a more consistent less favorable environment is diminishing.”
(Updates with Pill quotes, context.)
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