Bank of England’s Huw Pill Says Underlying Inflation Near 2.5 Percent, Rates Slightly Too Low

Bank of England Chief Economist Huw Pill has said that underlying inflation in the UK is settling closer to 2.5 percent rather than the central bank’s 2 percent target, warning that interest rates may now be slightly too low to fully contain price pressures. His remarks underline the growing debate within the Monetary Policy Committee over whether further rate cuts are appropriate this year.

Speaking at an event in London, Pill said that although inflation is expected to fall in the coming months, the underlying trend remains firmer than headline projections suggest. He noted that interest rates are still restrictive overall but described them as a little bit too low given persistent domestic price pressures.

The Bank of England voted by a narrow 5 to 4 margin last week to keep its benchmark interest rate unchanged at 3.75 percent. The close split reflects divisions among policymakers after six rate cuts since August 2024. Financial markets currently expect one or two additional reductions later this year, though uncertainty remains high as economic data continues to fluctuate.

The central bank forecasts that inflation will drop sharply from 3.4 percent in December to close to the 2 percent target by April or May. Much of that expected decline is linked to one off effects such as regulated energy prices and measures introduced in Chancellor Rachel Reeves’ November budget. Pill cautioned that the projected return to target could prove temporary once those temporary influences fade.

He said that when the impact of the budget is stripped out, underlying inflation appears closer to 2.5 percent. That level, he argued, suggests that price pressures in the domestic economy have not fully eased. In previous voting rounds, Pill has opposed rate cuts, arguing that monetary policy may have been loosened too quickly and that inflationary forces still need to be contained.

Minutes from the February meeting showed that some members believe maintaining rates at their current level for longer could help ensure inflation returns sustainably to target. Others have expressed concern that keeping borrowing costs elevated for too long could slow growth and weaken the labour market more than necessary.

Pill also commented on wage and price setting behaviour among businesses, describing the outlook as resembling a shallow saucer. He suggested that while inflationary momentum may dip in the near term, there is a risk it could stabilise at a higher level than desired without sufficient policy restraint.

Governor Andrew Bailey has indicated that future decisions will remain data dependent, reinforcing the cautious tone adopted by the central bank. With inflation expectations and wage growth still under close scrutiny, upcoming economic releases are likely to play a decisive role in shaping the next move.

The debate within the Bank of England highlights the delicate balance policymakers face between supporting economic activity and ensuring inflation is durably anchored at target. As markets weigh the likelihood of further rate adjustments, Pill’s comments suggest that the path ahead may be more gradual and contested than previously anticipated.