(Bloomberg) -- Bank of England Chief Economist Huw Pill warned against cutting interest rates “too far or too fast” as he set out his case for a “gradual withdrawal” of restrictive monetary policy over the coming months.
Pill, one of the more hawkish members of the Monetary Policy Committee who opposed the quarter-point rate point cut to 5% in August but voted to hold in September, said he is concerned that inflation could prove “more lasting” than expected.
With tensions rising in the Middle East and posing a threat of higher oil prices, he added that policymakers “need to be alert to disturbances in the global economy.”
Pill was speaking at the Institute of Chartered Accountants in England and Wales on Friday a day after BOE Governor Andrew Bailey raised the possibility of “a bit more aggressive” rate cuts if the news on inflation continues to be positive.
Bailey’s comments in an interview with The Guardian newspaper caused the pound to slump more than 1% against both the dollar and the euro, with sterling suffering its worst day against the common currency since 2022.
After Pill’s less dovish comments, the pound briefly rose as much as 0.3% to $1.3168, before paring the move. Money markets had already trimmed wagers on the extent of BOE cuts before Pill spoke, with 135 basis points of easing seen through September 2025, seven basis points less than Thursday. Gilts dropped, sending the two-year yield — among the most sensitive to monetary policy — four basis points higher to 4.01%, reversing the prior day’s gains.
The nine members of the BOE’s rate-setting committee are very finely balanced, with five voting to lower borrowing costs to 5% from 5.25% in August and four preferring to hold. The September vote was 8-1 in favor of keeping rates unchanged but markets expect another quarter-point cut in November.
The decision appears to rest on the governor and the three deputy governors, who voted as a block first to cut rates and then to hold them. Pill is the most hawkish of the internal committee members.
The BOE has drawn up three potential cases that could characterize the economic outlook. The first is that inflation recedes naturally as pay growth weakens and services price inflation drops; the second is that inflation falls but only by maintaining relatively high interest rates; and the third that inflation proves more persistent due to “deeper structural changes” that mean rates need to stay high.
Pill said he is closest to the second camp but fears the third scenario is more likely than the first. “While further cuts in Bank Rate remain in prospect should the economic and inflation outlook evolve broadly as expected, the need for such caution points to a gradual withdrawal of monetary policy restriction,” Pill said. “It will be important to guard against the risk of cutting rates either too far or too fast.”
He believes there will be “continued disinflation” and sees merit in maintaining “a restrictive monetary policy stance to bear down on inflationary pressures” but remains concerned “about the possibility of structural changes sustaining more lasting inflationary pressures.”
“There is ample reason for caution in assessing the dissipation of inflation persistence,” he said.
Megan Greene, an external member who also voted to hold at the last two meetings, said on Monday inflation was moving “in the right direction” but a rebound in consumption could renew price pressures.
--With assistance from Alice Gledhill and Irina Anghel.
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