UK cannot yet declare victory over inflation, warns BoE deputy governor

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The UK cannot yet declare victory over inflation, a senior Bank of England official has warned, as she emphasised that the labour market remains tight.

At a conference in London on Monday, Clare Lombardelli, BoE deputy governor, expressed concern that, despite the fall in inflation in the past two years, pay increases were not slowing as quickly as the bank hoped, which could delay further interest rate cuts.

“It’s often been said that the last mile may be the hardest, and that’s where we are now,” she said.

“There are some signs that the process of wage disinflation may be slowing,” Lombardelli added. “It’s too early to declare victory on inflation.”

The BoE trimmed rates by a quarter point this month and cautioned that it was not in a rush to lower rates again.

BoE governor Andrew Bailey said last week that the bank needed time to assess risks including from large increases in employer national insurance contributions in October’s Budget.

Lombardelli told the Bank of England Watchers’ conference in London that the UK had made good progress in curbing inflation.

But she signalled she was worried about price pressures proving more stubborn than expected.

Inflation has fallen from its recent peak of 11.1 per cent in October 2022, but jumped to 2.3 per cent last month, up from 1.7 per cent in September. The BoE’s target is 2 per cent.

“I view the probabilities of downside and upside risks to inflation as broadly balanced,” Lombardelli said.

“But at this point I am more worried about the possible consequences if the upside materialised,” she added, noting that such a scenario would require rates to remain higher.

She flagged particular uncertainties about the labour market, saying it was “still a little tight and continues to exert upward pressure on wages”.

Lombardelli acknowledged the weakness of the most recent PMI index showing that business activity shrank for the first time in a year. But she said she would not draw conclusions from just one release.

The UK needed to be “vigilant” about the current weakness in the rest of Europe, she said, pointing to the strong links between the UK and EU economies. “That has an impact on us and will continue to do so.”

Lombardelli is presiding over reforms to the way the BoE approaches monetary policy following a critical review by former Federal Reserve chair Ben Bernanke. 

She said the process would take years rather than months, as the BoE overhauls the “whole nose-to-tail” process of the way it sets monetary policy in the biggest reforms since it was granted operational independence in 1997.

The changes reflect the importance of communicating uncertainty clearly in the face of larger and more frequent supply shocks, Lombardelli said.

However, she struck a cautious note on whether to publish the Monetary Policy Committee’s expected path for interest rates.

“Publishing a form of expected path risks [suggests] greater certainty about future rates than it is possible to give, which in turn undermines policy credibility,” she said.