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Bank of England chief economist Huw Pill has warned that UK consumer price inflation (CPI) is falling, but not as rapidly as the BoE had hoped, as he reiterated that interest rates must remain high to tackle persistent inflationary pressures.
“I think when we look at where we are now, short of something happening, underlying inflation is going to be 2.5%, once we take that half percentage-point impact from the budget out of the forecast we have for April/May,” Pill said at a London event.
The BoE has projected that inflation will fall to around 2% by April or May, but much of the anticipated decline is likely to be driven by government measures to lower energy prices rather than broader economic dynamics.
These measures, introduced in November by chancellor Rachel Reeves, are expected to be a key factor in the decline.
Data published by the Office for National Statistics showed the consumer prices index increased to 3.4% in December from 3.2% in November, a sharper rise than economists had expected. Prices increased by 0.4% over the month.
Read more: Bank of England holds interest rates at 3.75%
“Progress with disinflation is ongoing, but it’s not quite as rapid as we might have hoped,” Pill acknowledged, highlighting the challenges in reducing inflation despite recent slowdowns in consumer price growth.
Pill, who has consistently favoured a more restrictive monetary policy than many of his colleagues on the Bank’s Monetary Policy Committee (MPC), voted to keep the Bank of England’s key interest rate at 3.75% last week. He was also one of the few members who opposed previous rate cuts, citing concerns that earlier reductions had been made too quickly and had left lingering inflationary pressures.
In the minutes from the BoE’s February meeting, Pill expressed the view that these pressures still need to be addressed, and he has repeatedly warned that the disinflationary process is far from complete. He compared the outlook for business wage-setting and price-setting to a “shallow saucer”, suggesting that disinflation will be gradual and requires continued monetary restraint, meaning no rate cuts.
Read more: UK inflation rises for first time in five months in December
“In order to complete that [disinflation] process, monetary policy has a part to play and that means we do need to retain some restrictiveness in the stance of monetary policy until that process of disinflation is complete,” Pill said.
Despite concerns about a potential labour market slowdown, with four MPC members voting for a rate cut last week, Pill is confident that the economy is not on the brink of collapse.