Pill Condones Falling Rates Following Bank of England Decision

Above: File image of Huw Pill. Image © Global Utmaning, Lasse Skog. Modified from original, reproduced under CC licensing, non-commercial.

The Bank of England's Chief Economist has effectively condoned the fall in the cost of money in the UK that followed the Bank of England's Feb. 02 policy decision and guidance.

Huw Pill said in an interview on Friday that the Bank should be wary of doing "too much" in terms of raising interest rates, underscoring a view that the Bank was close to ending the rate hike cycle.

The Pound tracked UK bond yields lower on Thursday after the Bank of England dropped guidance that further "forceful" interest rate rises would be required.

It said any further hikes would be based entirely on the nature of incoming data.

Pill, in an interview with Times Radio, said the impact of previous rate hikes was yet to be fully felt: "a lot of policy in the pipeline... it is important we guard against the possibility of doing too much".

Above: UK two-year bond yields dropped following BoE guidance, taking lower. (GBP/EUR, bottom panel).

The Bank's forecasts show the UK economy is heading for a shallow recession that will last until the first quarter of 2023 and this would help bring inflation sharply lower over the duration of 2023.

Money markets have moved to price in rate cuts by year-end on the back of the Bank's guidance, something which Pill appears to be comfortable with.

"We have to recognise we have done a lot with monetary policy already. Interest rates have risen by almost 400 basis points. Given the lag, there is a lot of policy in the pipeline . . . It is important we guard against the possibility of doing too much."

The Bank hiked interest rates by 50 basis points on Thursday, meeting investor expectations.

But it signalled further rate hikes were contingent on economic data, specifically upcoming wage and inflation figures.

Should February's outturns surprise to the upside then rate hike expectations would likely rebuild, offering the Pound some support via the rates channel.