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A senior Bank of England official on Monday said it was a question of when and not if the central bank started reducing interest rates as a “reward” for continued declines in inflation, as policymakers lay the ground for easing policy this year.
Huw Pill, BoE chief economist, said key gauges of price pressures were not yet at a level that would permit the central bank’s Monetary Policy Committee to start easing policy, but he did not need to see underlying inflation hit its 2 per cent target to begin lowering rates.
Pill was speaking in an online question and answer session after the MPC last week held the BoE key rate at 5.25 per cent.
BoE governor Andrew Bailey signalled on Thursday that the central bank was ready to start easing policy, but not until it had more evidence that inflation was heading in the right direction.
“Lower interest rates are a reward to the economy for better inflation performance,” Pill said. “It is the focus on when, rather than if, I think, that has been what the governor has tried to focus on.”
The BoE has homed in on the labour market and services price growth as its key areas of focus as it seeks to determine whether inflation is on course to durably settle near its 2 per cent target.
Headline consumer price inflation stands at 4 per cent, well below peaks of more than 10 per cent, but other indicators remain too high for comfort.
Pill said there were some early signs of improvement across a range of inflation indicators, although this information was still too tentative for the BoE to act.
But he added the central bank did not need to see underlying inflation actually fall to 2 per cent before it cuts its key rate, because policy would still be “restrictive” even after a slight reduction in borrowing costs.
The OECD on Monday said the UK faces the highest rate of inflation in the G7 this year and next, underscoring the work that still lies ahead for the BoE as it seeks to bear down on price growth.
It forecast UK inflation would be 2.8 per cent in 2024 and 2.4 per cent in 2025, adding it expected the BoE to be in a position to lower interest rates in the third quarter of this year.
The BoE’s job of assessing the labour market has been hampered by uncertainty over key official data produced by the Office for National Statistics.
The ONS on Monday admitted publication of figures based on its “transformed” labour force survey would be pushed back six months from the previously expected date of March, meaning the BoE will continue to lack crucial insights on unemployment.