Interest rates should not be cut ‘too far or too fast’, warns Bank economist

The Bank of England should be cautious about cutting interest rates “too far or too fast”, the central bank’s chief economist has warned.

Huw Pill has signalled that rates should be cut in a “gradual” manner, amid caution over the long-term path of inflation.

The comments come a day after Bank of England governor Andrew Bailey suggested that “more aggressive” rate cuts could be on the way.

Mr Bailey said that if inflation remains in check the Bank might be able to be “more activist” over reducing borrowing costs, in an interview with The Guardian.

British interest rates currently sit at 5%. The rate – which is used by banks to determine the interest on mortgages and loans – was reduced from 5.25% in August.

Members of the Bank’s Monetary Policy Committee (MPC) voted to keep rates at 5% at the latest vote last month, but economists are currently pricing in another reduction at next month’s meeting.

However, Mr Pill took a contrasting tone regarding the future path of interest rates in his speech to the Institute of Chartered Accountants in England and Wales (ICAEW) on Friday morning.

“At present, there is ample reason for caution in assessing the dissipation of inflation persistence,” he said.

“While further cuts in Bank Rate remain in prospect should the economic and inflation outlook evolve broadly as expected, it will be important to guard against the risk of cutting rates either too far or too fast.

“For me, the need for such caution points to a gradual withdrawal of monetary policy restriction.”

Higher interest rates have been used by UK policymakers over the past two years to help bring down inflation, which stood at 2.2% in August according to the latest data from the Office for National Statistics.

Mr Pill told the audience that this is predicted to move closer to 2.5% by Christmas.

“But this upward blip reflects temporary factors and base effects, with inflation expected to fall back next year,” he added.