Despite reaching its inflation target, BOE shouldn’t cut rates too quickly, one governor warns

The Bank of England’s (BOE) chief economist has warned that policymakers shouldn’t be "trigger-happy" with rate cuts, even after achieving their inflation target.

Huw Pill, who also serves on the BOE’s nine-member Monetary Policy Committee, said the U.K. has “made progress” on controlling inflation but isn’t out of the woods yet.

“There are some sorts of dynamics in the U.K. economy, a small persistent component that we need to be cautious about,” Pill said one day after the BOE’s policy meeting.

“I think we shouldn’t be yet promising [that] rates are going to move down further in the very short term.”

The BOE voted to lower rates by 0.25% following a 5-4 vote. The slim margin underscored policymakers’ anxiety about cutting rates too soon. Interestingly, Huw was one of the four officials who voted against rate cuts.

The BOE’s progress on inflation has accelerated over the past year, with the Consumer Price Index (CPI) falling to 2% in May for the first time since 2021. That's in stark contrast to an eye-watering 8.7% one year earlier.

Despite this progress, Pill warned that inflationary forces are still bubbling beneath the surface, which is why policymakers must be extra cautious.

What’s going on with the labor market?

The chief economist’s concern about inflation stems from still high wage growth.

According to the Office for National Statistics, employee wages, excluding bonuses, increased by 5.7% annually between March and April—higher than in mid-2022. Earnings, including bonuses, also grew 5.7% annually.

That's why Pill thinks the central bank needs “to keep some restriction in the system somewhat longer from the monetary policy side.”

Although wage growth expectations have weakened lately, “there are also enough signals for us to expect wage growth and inflation to linger above target[s],” said Robin Wood, the chief U.K. economist at Pantheon Macroeconomics.

Despite the lingering inflation risk, policymakers recognized that the U.K. economy needed a boost. In 2023, it met the technical definition of a recession after recording back-to-back quarters of contraction.

For this reason, the BOE has proven more proactive than the Fed, which has decided to withhold rate cuts despite mounting evidence of a slowing economy.

The Fed now finds itself between a rock and a hard place, playing catch-up to backward-looking economic data.

Meanwhile, the BOE joins a growing list of central banks that are cutting rates this year. By dragging its feet, the Fed risks becoming too reactionary to changes in the economy.

Both central banks will have the opportunity to digest more fresh inflation data before their next policy meetings in September.

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