Wednesday, July 10, 2024 3:26 p.m
Huw Pill, the Bank of England’s chief economist, does not yet appear to be convinced of the case for an August rate cut, but said a rate cut is still “when-rather-than-if”.
In a speech at Asia House in London, Pill said recent economic data pointed to some “upside risks to my assessment of the persistence of inflation”.
Pill referred to the latest data on services inflation and wage growth, both of which the bank said were good indicators of the persistence of inflation.
He said year-on-year services inflation and wage growth “continue to point to an uncomfortable strength in this underlying inflation dynamic”.
Inflation in services rose to 5.7 percent in May from 5.9 percent in April. At the same time, the year-on-year growth of wages in the private sector is still around six percent.
Although the headline inflation rate has fallen to the target, bank economists worry that it will be difficult for inflation to stay at two percent while underlying price pressures remain strong.
Pill acknowledged that these were “noisy data series” but still argued that “it’s hard to dispute the case that the persistence of inflation in the UK is still being demonstrated – well persistent”.
“Further data will be available before we make our next policy decision at the MPC meeting on August 1,” Pill said. “But we have to be realistic about how much a release or two can add to our ranking.”
The Bank of England left interest rates at 5.25 per cent at its last meeting in June, but the minutes showed the decision was “finely balanced”.
The pound rose just under 0.4 percent against the dollar after Pill’s comments, while the FTSE 100 fell slightly as traders trimmed their bets on the chance of an August rate cut. Markets think there is a 50 percent chance the bank will cut rates next month, up from more than 60 percent before Pill spoke.
Despite his concerns about the persistence of inflation, Pill was still convinced that higher interest rates had helped curb inflation.
“The latest data also remains consistent with the view that these inflationary pressures are now under control and may begin to return to levels more consistent with achieving the inflation target,” he said.
“Absent any major new shocks, the ‘when rather than if’ characterization of a potential bank rate cut still seems appropriate,” he added.