Bank of England chief economist Huw Pill said there is “scope for further reductions” in the base rate if the Bank looks past the Budget’s temporary inflation hit.
Pill, a member of the rate-setting Monetary Policy Committee, was speaking at a briefing to businesses, after the Bank had yesterday cut the interest rate by 0.25% to 4.75%.
But the MPC minutes warned that Chancellor Rachel Reeves’ Budget last month, which will spend almost £70bn over the next five years, will push up inflation next year.
The body estimates quarterly economic growth in a year’s time will be 1.7% as opposed to the 0.9% it was forecasting in August.
But along with this, inflation will be 2.7% rather than 2.2% and it will take a year longer, until early 2027, for the cost of living to return to its 2% target.
However, Pill says this is a temporary boost to inflation, with much of the government’s spending coming in the first two years of the parliament.
He said: “To a large extent, we will have to look through and interpret [the measures in the Budget] in a way that allows us to have a good sight of these underlying and more persistent components of inflation that really have to be the focus of what’s driving our policy decisions.”
The UK “remains in a disinflationary process,” he pointed out.
He added: “We are not fully there yet but we are making progress. The fact we are making progress means there is less need for restriction in monetary policy.”
However, Pill said that the pace of the UK economy could be at risk if the election of US President Donald Trump led to rounds of trade tariffs between developed countries.
He added: “The UK, as a small open economy, is vulnerable to those types of shocks and disturbances to the global economy.”
The Bank said yesterday that rate cuts over the coming year would be “gradual”.
But the City has scaled back its expectations for rate cuts next year to just two or three, following the Budget.
This contrasts with earlier market expectations of four quarter-point rate cuts in 2025.