If the Bank of England cuts interest rates “too far or too fast”, long-term inflation could be negatively impacted, the central bank’s chief economist has warned.
Huw Pill indicated that rate cuts should be done in a “gradual” manner due to concerns about the long-term inflation trajectory.
These comments came after Bank of England governor Andrew Bailey hinted that interest rate cuts could soon become “more aggressive”.
In an interview with The Guardian, Mr Bailey suggested that if inflation remains under control, the Bank could take a “more activist” approach to lowering borrowing costs.
Following the governor’s remarks, several leading banks moved forward their predictions for interest rate cuts, which contributed to the pound’s sharpest drop in over a year.
The Base Rate currently stands at five percent, after being reduced from 5.25 percent in August. The five percent rate, which influences mortgage and loan interest rates, was maintained after the Monetary Policy Committee (MPC) voted to hold it steady last month, though economists now anticipate another reduction in the upcoming meeting.
However, Mr Pill struck a different tone regarding future rate cuts during his speech at the Institute of Chartered Accountants in England and Wales (ICAEW) on Friday morning. He said: “At present, there is ample reason for caution in assessing the dissipation of inflation persistence.”
Mr Pill explained: “While further cuts in Bank Rate remain in prospect should the economic and inflation outlook evolve broadly as expected, it will be important to guard against the risk of cutting rates either too far or too fast.
“For me, the need for such caution points to a gradual withdrawal of monetary policy restriction.
Over the past two years, UK policymakers have used higher interest rates to combat inflation, which stood at 2.2 percent in August according to the latest data from the Office for National Statistics.
Mr Pill told his audience that inflation is expected to reach around 2.5 percent by Christmas, noting that the “upward blip” reflects temporary factors and base effects, with inflation expected to fall back next year.
