Bank of England’s Pill Cautions Against Rapid Rate Cuts Following Bailey’s Suggestion for Increased Pace

By David Milliken and William Schomberg

LONDON – The Bank of England should proceed cautiously with interest rate cuts, according to Chief Economist Huw Pill, who spoke out on Friday following comments from Governor Andrew Bailey suggesting a more aggressive approach to lowering borrowing costs.

Pill highlighted ongoing inflation risks in his address, which led to a minor recovery in the value of sterling after it had fallen sharply on Thursday in response to Bailey’s statements.

"While further cuts in the Bank Rate are possible if the economic and inflation forecasts unfold as anticipated, it is crucial to be mindful of the risks associated with reducing rates too quickly or too extensively," Pill stated during his speech at the Institute of Chartered Accountants in England and Wales. He emphasized the need for a gradual easing of monetary policy restrictions.

The Monetary Policy Committee of the Bank of England is widely expected to reduce interest rates by a quarter-point at its upcoming meeting in November. The committee made its first rate cut in over four years in August, a move that Pill opposed.

Financial market opinions are divided about whether the BoE will implement another rate cut in December following the anticipated November reduction. The central bank has not cut rates at consecutive meetings since 2020.

In an interview, Bailey had indicated that the Bank could consider a more aggressive intervention if there were further positive developments regarding inflation.

Following Pill’s remarks, sterling rose by a fifth of a cent against the U.S. dollar after experiencing a drop of more than a cent the previous day.

Investors have generally anticipated that the Bank of England would adopt a slower pace of rate cuts compared to the U.S. Federal Reserve and the European Central Bank, a notion that Bailey’s comments seemed to contest.

Andrew Goodwin, chief UK economist at Oxford Economics, noted that the likelihood of a December rate cut appears to be increasing, suggesting that Bailey’s perspective aligns more closely with that of most members of the MPC.

"The Budget scheduled for October 30 is likely to play a critical role in determining whether Bailey’s faction opts for a quicker pace in rate reductions, especially in light of recent discussions about potential changes to fiscal rules that could enable a looser fiscal policy," Goodwin commented.

Finance minister Rachel Reeves has indicated that higher taxes are likely in her upcoming budget, marking her first since Labour’s return to power on July 4. However, she and Prime Minister Keir Starmer have also emphasized the need to enhance investment.

Pill expressed ongoing concern about potential structural changes in the UK economy that could maintain inflationary pressures, stating there are "ample reasons" for caution in assessing how swiftly inflation might persist.

Additionally, Pill pointed out that inflation within service sectors and wage growth remain significant concerns.

An alternative economic forecasting model, which was based on similar initial assumptions as the BoE’s main model but lacked the same restrictions on possible outcomes, suggested that inflation could stay slightly above 2% in the medium term.

Pill remarked that this alternate model deserves serious consideration, indicating that both the neutral interest rate and the natural rate of unemployment could be higher than the Bank of England currently assumes.

"I have greater concerns regarding inflation than what is reflected in the MPC’s published forecasts," he stated.