Pound's Recovery Helped by Pill's Pushback Against Rate Cut Bets

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

Pound Sterling extended its recovery against the Euro, Dollar and other currencies after the Bank of England's Chief Economist made it quite clear the outlook for UK monetary policy had not changed significantly in the recent path.

The Pound to Euro exchange rate extended its advance to 1.1621 after Pill said "the outlook for UK monetary policy in the coming quarters has NOT changed substantially since the beginning of March."

He placed an emphasis on "not", in what looks to be an expression of frustration regarding recent developments. Expectations for a June rate cut have risen noticeably since last week following comments made by the Bank of England's Andrew Bailey and Dave Ramsden, who expressed satisfaction with recent inflation prints.

The market judged the commentary as supportive of imminent rate cuts. 

Speaking at the University of Chicago Booth School of Business in London, Pill pushed back against rising expectations for cuts:

"Let me start with my main message: in my view, against the background of a welcome decline in headline inflation, the outlook for UK monetary policy in the coming quarters has not changed substantially since the beginning of March."

The Pound to Dollar exchange rate extended its recovery to 1.24 after Pill's speech was released, suggesting market expectations for a June cut were receding once more.

Should the Bank cut interest rates prematurely, the danger arises that it will help boost inflation, requiring it to stage a humiliating about-turn and raise interest rates again later on. This would be incredibly damaging to confidence in the Bank and the economy.

He noted, "we are now seeing signs of a downward shift in the persistent component of inflation dynamics. But we still have a reasonable way to go before I am convinced that the persistent momentum in underlying inflation has stabilised at rates consistent with achievement of the 2% inflation target on a sustainable basis."

Just hours earlier, the release of the April PMI survey showed the UK economic rebound gathered pace in April, and cost pressures facing businesses had returned to multi-month highs. Of particular concern to businesses in the services sector was the elevated cost of wages.

The Bank has long said it is concerned with service sector inflation, with Pill's colleague Jonathan Haskel saying earlier today the labour market needs to loosen before inflation can fall to 2.0% sustainably.

"While that persistent component of inflation continues to threaten the lasting achievement of the 2% inflation target, the MPC will need to maintain a degree of restrictiveness in its monetary policy stance. That is necessary to squeeze the persistent component out of the system," said Pill.

We have heard from the majority of Monetary Policy Committee members now, and based on the evidence, we reckon Bailey, Ramsden, and Dhingra would vote for a cut in June, all else equal. Mann, Greene, Haskel, and Pill appear to be leaning towards holding rates but potentially open to an August rate cut.