BoE economist’s inflation warning dampens talk of summer rate cut

The prospects of a summer cut in UK interest rates have receded after the Bank of England’s chief economist said inflation must be squeezed out of the economy and cautioned against cutting too soon.

After a key survey signalled strong sales across the private sector over the past month and the London stock market rose to a record high, Huw Pill said concerns remained that inflation, which is expected to fall below its 2% target within a few months, could then rebound as the economy strengthens.

Speaking in London, Pill said: “We still have a reasonable way to go before I am convinced that the persistent momentum in underlying inflation has stabilised at rates consistent with achievement of the 2% inflation target on a sustainable basis.” He added: “[It] is necessary to squeeze the persistent component [of inflation] out of the system.”

After his speech, financial markets pushed back expectations that the Bank would start cutting interest rates in September. Earlier in the day, investors were betting on a first cut in August from 5.25%.

His comments came as a closely watched survey of business activity by S&P Global showed a strong performance by the services sector and a rise in job hiring, in signs that businesses were heading into the summer in a buoyant mood.

The flash UK purchasing managers’ index (PMI), which covers the services and manufacturing sectors, rose to 54 in April, up from 52.8 in the previous month. A figure above 50 indicates a period of expansion.

ation came soon after the FTSE 100 hit a record high of 8,076 points, driven by hopes that the UK would cut rates sooner than the US and relief that the Middle East crisis had not escalated further.

But Pill’s warning that rate cuts could be delayed deflated some of the stock market exuberance, sending the London market back down to close at 8,044 points.

Jonathan Haskel, who sits with Pill on the Bank’s nine-strong monetary policy committee, indicated at a separate event in London yesterday that the recovery under way in the UK could delay the first interest rate cut by the central bank. Taking a tough stance that contrasted with several other bank officials, Haskel said more weakness in Britain’s labour market was needed to be confident that inflation would stay at 2%.

“The labour market is central to the inflation aspect,” Haskel said at a seminar at City, University of London’s Bayes Business School when asked if he now thought it possible inflation would hold at 2% rather than rise later this year.

He said the number of job vacancies had fallen while unemployment had increased, showing the labour market was weakening, but it was unclear if it was weakening quickly enough to keep inflation on target. Figures next month covering GDP

from January to March are expected to confirm the UK is no longer in recession. Initial estimates showed the economy shrank slightly in the third and fourth quarters of 2023.

‘It is necessary to squeeze persistent [inflation] out’

Huw Pill Bank of England