Pill Breaks Ranks And Openly Condones Rate Cut Bets

Above: File image of Huw Pill, Chief Economist at the Bank of England. Image © Sérgio Garcia/Your Image for ECB.

The Bank of England's Chief Economist became the first insider at a major central banker to condone market bets for a 2024 interest rate cut.

Pill effectively verified market bets for the first interest rate cut by the Bank of England to fall towards the middle of 2024, in what amounts to the first significant admission lower interest rates lie ahead.

Huw Pill said investors were not "unreasonable" to expect a first-rate cut to fall next summer. In an online Question-and-answer session with the public, Pill said interest rates would have to stay at or near their current level "into the middle of next year".

"It is at that point you might consider or reassess if nothing new has happened, where we are going to have to be," he said. "That’s what financial markets currently anticipate, but it doesn’t seem totally unreasonable, at least to me."

"This was the first time a Bank insider had talked positively about loosening policy and contrasted with Pill's previous comments about a 'Table Mountain' profile for rates, so this intervention appeared significant," says Andrew Goodwin, Chief UK Economist at Oxford Economics.

Downside risks to the British Pound would emerge if rate cut expectations advance faster in the UK relative to elsewhere, which becomes possible if Bank of England speakers increasingly engage in such communications.

Pill has previously said UK interest rates should be held "in a more steady and resolute way with a profile for interest rates that looks more like the Table Mountain."

Therefore, Table Mountain might not be as flat as Pill had us believe when he delivered his last major speech in Cape Town in August.

The guidance is also somewhat at odds with Bank of England Governor Andrew Bailey's recent communication that sought to push back against any move by the market to bring forward rate cut expectations, which would be reflected in lower UK bond yields.

This acts to bring down the cost of money and works against the Bank's stated agenda of bringing inflation back down to target.

In a media interview following last week's Bank of England decision, Bailey said, "if the market has taken from what we have published today a view that we are leaning towards more cuts, then I'm afraid I will lean against that, yes."

Pill and his peers on the Bank's Monetary Policy Committee sees UK inflation falling rapidly from here, which would put the Bank in a better position to consider rate cuts in the coming months.

"Headline inflation will fall rapidly in October (the BoE forecasts a drop from 6.7% to 4.8% - the data will be released in two weeks’ time) due to a base effect and lower household energy prices. It will likely continue to fall quite quickly subsequently, as lower pipeline pressure for food and core goods is passed through," says Daniel Vernazza, Chief International Economist at UniCredit.

However, wages remain elevated and services inflation looks to remain 'sticky', preventing the Bank from declaring victory on inflation anytime soon.

"We expect rate cuts to start in 3Q24, later than the Fed and ECB, reflecting the higher stickiness of wage growth and services inflation in the UK. But with the economy likely to enter a recession in the coming quarters, and inflation clearly moving down towards 2% next year, we expect 75bp of rate cuts in total for 2H24, a faster pace of rate cuts than the market is expecting," says Daniel Vernazza, Chief International Economist at UniCredit.