By Paul Hannon
The Bank of England is likely to lower its key rate at some time in the future, but recent data indicates that inflation might remain high for longer than anticipated, Chief Economist Huw Pill said Wednesday.
The U.K.'s annual rate of inflation fell to the BOE's 2% target in May. However, services inflation came in at 5.7%, easing only a little from the 5.9% rate recorded in April.
Pill said the rise in services prices, coupled with similarly rapid rises in wages, were signs of uncomfortable strength in underlying inflation.
The economist also said that while there will be new data available before rate setters next meet in August, they should be cautious and realistic about how much that can clarify the outlook for prices.
Pill's comments suggest he is unlikely to back a rate cut at the August meeting, although he didn't rule out lowering borrowing costs at some point.
"In the absence of any big new shocks, the 'when-rather-than-if' characterisation of prospective Bank Rate cuts still seems appropriate," he said in a speech.
Pill's comments are the first from a senior BOE official since May 22, when then Prime Minister Rishi Sunak called a surprise general election. By convention, government officials don't speak in public about the state of the economy, or other issues of contention, during an election campaign.
The BOE's Monetary Policy Committee did meet on June 20, and left its key rate unchanged at a 16-year high. While the votes of MPC members were unchanged, with only two supporting a rate cut, the record noted that for some of the seven who had backed a hold, the decision was "finely balanced."
Jonathan Haskel, a member of the MPC who doesn't work full-time for the BOE, indicated on Monday that he would continue to vote against a rate cut.
While inflation has fallen to the BOE's target level for now, the decline since the middle of 2023 has been driven primarily by energy prices, which have tumbled on global markets.
Policymakers at the BOE worry that when they level out, overall inflation will be driven higher by prices that are mainly responding to domestic pressures, including rapidly rising wages.
The BOE has lagged behind a growing number of its European peers. Last week, Romania's central bank lowered its key interest rate nearly a month after the European Central Bank cut borrowing costs for the first time since 2019. The central banks of Switzerland, Sweden, Serbia and the Czech Republic have also cut their key rates this year.
The Federal Reserve has yet to cut its key rate, although Chair Jerome Powell made a subtle but important shift that moved the central bank closer to lowering interest rates when he suggested Tuesday that a further cooling in the labor market could be undesirable.
Write to Paul Hannon at paul.hannon@wsj.com
(END) Dow Jones Newswires
07-10-24 1016ET
