Bank of England issued warning over cutting interest rates 'too far'

The Bank of England has been warned not to cut interest rates “too far or too fast” amid caution over the long-term path of inflation.

The central bank’s chief economist Huw Pill said rates should be cut in a “gradual” manner - taking a different tone to that of Bank of England governor Andrew Bailey, who suggested “more aggressive” rate cuts could be on the way.

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

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Members of the Bank’s Monetary Policy Committee (MPC) voted to keep rates at 5 per cent at the latest vote last month, but economists think another reduction could be on the way at next month’s meeting.

On Thursday, in an interview with the Guardian, Mr Bailey said the Bank might be able to be “more activist” over reducing borrowing costs if inflation remains in check. His comments led a number of leading banks to bring forward predictions for interest rate cuts and contributed to the sharpest drop in the pound for more than a year.

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.

He told the conference: "At present, there is ample reason for caution in assessing the dissipation of inflation persistence. 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."

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