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Bank of England Chief Economist Calls for Persistent Interest Rates to Tame Inflation

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Bank of England Chief Economist Huw Pill has stated that it is crucial for interest rates to remain at their current level in order to control inflation. This marks a change in tone from Pill’s earlier remarks, where he discussed the possibility of rate cuts next year. The Bank of England last week decided to keep its main interest rate at 5.25% and stated that rates would need to stay at that level for an extended period.

Pill acknowledged that market pricing points towards a potential rate cut in August 2024, which he deemed as “not totally unreasonable.” However, he emphasized that British consumer price inflation was the highest among large advanced economies in September, standing at 6.7%. Although the Bank of England expects a significant drop in October’s inflation data, it anticipates that it will take another two years for it to return to its 2% target.

During a presentation to the Institute of Chartered Accountants in England and Wales (ICAEW), Pill highlighted the persistence of inflation as a concerning factor. He stressed the importance of a persistent restrictive monetary policy, referring to the current Bank Rate of 5.25%, in order to tackle the inflationary situation.

Despite a recent slowdown in growth, Pill expressed concerns about domestic inflation pressures, particularly rapid private-sector wage growth. He stated that these pressures had not yet eased, raising questions about the medium-term outlook for inflation.

Pill clarified that he did not believe a further rate increase was necessary. However, he noted that the Bank of England’s inflation forecasts were based on market pricing in the lead-up to the recent decision to maintain high interest rates. These forecasts assumed an average interest rate of 5.1% in the final quarter of 2023, indicating a potential quarter-point cut at that time, and rates of 4.5% by late 2025.

Following Pill’s remarks on Monday, interest rate sensitive two-year gilt yields experienced a significant decline, reaching a five-month low. Rate futures also reflected market expectations of a rate cut, with a greater than 50% chance of a cut by June 2024 and rates falling to 4.75% by the end of next year.

Bank of England Governor Andrew Bailey echoed Pill’s sentiment on Wednesday, stating that it was premature to discuss rate cuts. As Pill spoke on Thursday, two-year gilt yields rose, and rate futures adjusted their expectations for a potential June rate cut. However, they still anticipate at least two quarter-point cuts in the coming year.

Pill also emphasized that central bank comments on the outlook for monetary policy should not be interpreted as firm commitments but instead as plausible scenarios. He highlighted the focus on current events in the Middle East as a factor that influences decision-making.

It is important to note that the Bank of England’s Chief Economist’s remarks represent his viewpoint and do not necessarily reflect the official stance or immediate actions of the central bank. The Bank of England is known for its data-driven approach to monetary policy and will carefully consider various factors before making any adjustments to interest rates or other policy measures.

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