The pace of UK interest rate cuts has been “too rapid” at a time when pay packet increases remain strong and could fuel a resurgence in inflation, according to the Bank of England’s chief economist.
Huw Pill said on Tuesday that workers were proving to be more successful than previously thought at boosting wages and this should give policymakers reason to pause before cutting the cost of borrowing again.
However, he added that the path for interest rates remained downward.
Pill voted to keep rates on hold at ameeting of the Bank’s monetary policy committee (MPC) this monthwhen most of the nine-member group voted to cut rates by 0.25 percentage points to 4.25%.
He said the quarterly pace of rate cuts since mid-2024 had been too rapid and his colleagues should be cautious before making further cuts.
Pill was speaking before the release on Wednesday of inflation data for April that is expected to show consumer prices increased sharply, driven in part by higher energy bills.
He added: “I would characterise my May vote as favouring a ‘skip’ within a continuing withdrawal of monetary policy restriction, rather than a halt to the process of withdrawal.
“It should not be seen as favouring a halt to – still less a reversal of – that withdrawal of restriction.”
Financial markets expect two further interest cuts, to 3.75%, by the end of the year as policymakers attempt support the economy during an expected period of “subdued” growth and increase in unemployment.
While the economygrew at the fastest pace in a yearin the first three months of the year, at 0.7%, the Bank estimates the underlying growth rate for the rest of the year is just 0.1% in each quarter.
Recent PAYE data has emphasised the UK economy’s weakness with employers laying off workers in each of the last three months, which economists have said was in response to higher taxes and rising global uncertainty after Donald Trump’s tariff war.
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The Bank’s governor, Andrew Bailey, has said inflation was unlikely to have longer-lasting effects on pricing behaviour, and two members of the MPC voted for a half-point cut in rates at the last meeting, citing the potential long-term damage to the economy from high interest rates.
However, Pill said he was concerned that the structure of the UK labour market was becoming less flexible, giving employees the power to maintain their living standards through higher pay.
He said services companies were continuing to award large pay rises, slowing the fall in wage growth.
“I remain concerned that structural changes in the price- and wage-setting behaviour have increased the intrinsic persistence of the UK inflation process. That not only makes inflation higher for longer in the aftermath of pandemic and invasion-induced inflationary shocks than would otherwise have been the case. It also influences the appropriate Bank response in pursuit of lasting achievement of the inflation target,” he added.