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    Bank of England Chief Economist calls for “patience” ahead of future interest rate cuts

    Published On: 10 July 2024

    Huw Pill, the Bank of England’s Chief Economist, remains cautious about a potential interest rate cut in August but said that a rate reduction remains a matter of “when-rather-than-if”.

    Speaking at Asia House on Wednesday 10 July, Pill said the underlying drivers of inflation were showing “uncomfortable strength” and said they remain persistent. The BoE, he said, had to ensure these dynamics were “squeezed out of the system”.

    Markets had priced in a cut in rates at the next Monetary Policy Committee (MPC) meeting on 1 August. However, Pill’s cautious stance appears to have tempered expectations.

    The MPC has emphasised three key indicators of inflation persistence: labour market tightness , pay growth and services inflation. Of those three, Pill noted that annual services price inflation and wage growth “continue to point to an uncomfortable strength in those underlying inflation dynamics”.

    Pill said the Bank of England is still striving to understand why current inflation dynamics exhibit greater persistence than in the Bank’s standard model framework. One explanation could be the “decaying second round effects in price and wage inflation following the big external shocks associated with the pandemic and Russia’s invasion of Ukraine”, which could take longer to dissipate, according to Pill.

    Another possibility is that inflation persistence might represent a more permanent change to price, wage and margin setting behaviour, which could be associated with changes in the “pay structure, different competitive dynamics in the markets for labour, product and services, or with high degrees of real income resistance”.

    Pill said the MPC therefore faces a challenge to get the right balance: “enough monetary policy restriction to achieve the inflation target, but neither too much nor too little for fear of destabilising the economy”.

    Speaking publicly at Asia House to an audience of leading business executives, economists and diplomats, Pill left the possibility of future interest rate cuts open, concluding that “in the absence of any big new shocks, the ‘when-rather-than-if’ characterisation of prospective Bank Rate cuts still seems appropriate.”

    Find the full transcript of Pill’s speech here.

    Watch the full video here.

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