The Bank of England must prevent cutting interest rates “too far or too quickly” to avoid rising inflation, its chief economist has warned.
Huw Pill, who also sits on the central bank’s rate-setting monetary policy committee, said high service prices and wages were making inflation “stickier” than central bank policymakers had previously predicted.
The cost of living is currently at 3.8% and is expected to reach 4% when official figures are released next week.
That would be the highest inflation rate so far this year and double the central bank’s 2% target.
“All of this supports my view that the Monetary Policy Committee should take a more cautious step from now on in removing restrictions on monetary policy to ensure that deflation continues to achieve the 2% target,” Peel told a conference of the Institute of Chartered Accountants in England and Wales in London.
Peele, one of the more hawkish members of the MPC, added: “While I expect further rate cuts over the coming year if the economic and inflation outlook develop as broadly as the MPC expects, it remains important to guard against the risk of cutting rates too far or too quickly.”
It has been cut five times since August 2024 and currently stands at 4%.
The MPC was divided over whether the rise in inflation was due to temporary increases in food and energy costs, or to lower long-term services and wage costs.
But Peel believes services sector inflation and rising wages are to blame.
The bank’s nine-member monetary policy committee voted 7-2 last month Keep bank interest rates unchanged at 4%Alan Taylor and Swati Dhingra campaigned for a quarter-point cut in interest rates to 3.75%.
Peel said: “I still view the decision to keep the central bank’s interest rates on hold as a ‘jump rather than a stop’ in the normalization of monetary policy.
“But the need to recognize the stubbornness of inflationary pressures is becoming more urgent.”
Earlier this week, Central Bank Governor Andrew Bailey said the latest round of labor market data supported his view that underlying inflationary pressures were cooling.
Those official figures showed average wage growth in the three months to August was 4.7%, down from 4.8% in the three months to July.
The national unemployment rate increased slightly from 4.7% to 4.8%.
Money markets have brought forward bets on when the central bank might cut interest rates again from April to February.
