Bank of England (BOE) chief economist Huw Pill said he is erring on the side of caution in deciding when to cut UK interest rates, saying officials need to remain on guard for risks that inflation persists.

Pill said the economy and price pressures had evolved roughly as he expected at the start of March. As a result, “the absence of news and the passage of time have brought a bank rate cut somewhat closer”.

However, he pushed back against expectations of an imminent move, saying there is “still a reasonable way to go before I am convinced that the persistent momentum in underlying inflation has stabilised”.

Pill’s comments in a speech in London come shortly before the BOE goes into a silent period ahead of its next rate decision on May 9, when the bank will also publish a full forecast of inflation and growth. The central bank signalled in February that rate cuts are on the cards later in the year if inflation drops back to the 2% target as expected. 

Economists and Pill now expect a sharp drop in price pressures in April due to easing energy costs. Even so, the last readings of inflation both in the UK and US were above expectations, triggering investors around the world to pare back expectations for sharp rate cuts this year.

Traders are pricing in just two quarter-point reductions in the BOE’s base rate by the end of this year, down from five or six at the start of the 2024. Pill’s remarks contributed to that pullback, with investors also responding to stronger-than-expected figures for the government’s deficit and borrowings. 

Pill said he remains concerned about sticky core and services inflation, which remains elevated. 

Last week, both governor Andrew Bailey and deputy governor Dave Ramsden signalled that they believe the time for a rate cut is closing in, and that the UK can reduce rates before the US Federal Reserve. 

Speaking earlier on Tuesday, Jonathan Haskel, another of the BOE’s nine rate setters, warned that the UK labour market remains “very tight”, which he said is “central to the inflation aspect”. Haskel had been voting to raise rates until recently. 

Megan Greene, another former hawk on the Monetary Policy Committee, last week also expressed concerns that underlying inflation may be persistent.

In his appearance on Tuesday, Pill also drew attention to signs that worker shortages may persist. “We focus on tightness of the labour market, pay growth and services inflation,” he said. “This persistent component of inflation may still be threatening that we see a bounce back up.”

“I am erring on the side of caution with reducing the bank rate,” he said. “In my view, there are greater risks associated with easing too early should inflation persist rather than easing too late should inflation abate.”

He added that the hurdle to reducing his concerns about the persistence of inflation is relatively high. While welcoming the “backdrop of declining headline inflation”, he said there had been little relevant news since he last spoke on March 1.

“This suggests little need to amend the assessment of the economic, inflation and policy outlook that I offered then.”

“I do think that the persistent component of inflation is being squeezed out of the system by restrictive monetary policy. But I don’t see reason to believe that is happening more rapidly or profoundly than I expected six months ago.”

  - Bloomberg