Bank of England Chief Economist Huw Pill said data on pay and inflation in the services sector are still “stubbornly high,” warning that there’s a risk price increases will be more persistent than policy makers expect.
Pill said that the news on key underlying inflation signals being watched by the BOE have been “not so good” after new data on Tuesday that showed the labor market is holding up despite a flatlining economy.
He said in a panel event at the Festival of Economics in Bristol that wage growth is “very strong” and that services inflation has been “stubbornly high.” He said neither measure is consistent with bringing inflation back to the BOE’s 2% target, requiring a “persistent restrictiveness” in policy.
The remarks are more hawkish than those made by Pill last week, when he fueled bets on rate cuts by suggesting that they could be under consideration by the middle of next year. They strengthen the BOE Governor Andrew Bailey’s case for keeping rates elevated for a prolonged period to ensure inflation eases.
The latest comments suggest Pill still remains wary over inflationary pressures in the UK even as speculation continuesto build over when the BOE will cut rates.
They come ahead of figures on Wednesday that are expected to show inflation fell sharply to below 5% in October, well down on the double digit price growth suffered last year.
“The risks are that inflation shows a little bit more persistence,” Pill said. “We don’t need to raise interest rates further necessarily. I think we’re prepared to if we learn things that go in a concerning inflationary direction.”
During the panel, Pill reiterated that inflation is still too high and said there has been a slowing in the economy’s momentum.
“There are signs that the economic momentum in the real part of the economy is not as strong as it was,” said Pill.
“That resilience seems to be a little bit easing.”
He also dismissed concerns that a switch in the UK from floating rate mortgages to fixed deals, largely lasting two or five years, is slowing the effectiveness of monetary policy. He said there is not evidence for this as many households will cut back spending ahead of their actual payments going up.
“If they think interest rates are going to stay higher, then the fact that they know that’s going to come will alter their behavior today, even though they’re not having to pay that higher interest rate today,” he said.