BOE’s Pill Says Rate Cuts Hinge on No New Shocks After Trump Win

Tom Rees and Irina Anghel
·2-min read

(Bloomberg) -- Bank of England Chief Economist Huw Pill said that future interest rate-cuts will depend on the UK economy avoiding “big new disturbances” after the return of Donald Trump to the White House raised the threat of a global trade war.

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Pill said on Friday that the central bank can ease policy more if price pressures continued to cool. However, he cautioned that there are “plenty of potential sources of big disturbances” that could knock the BOE off course after a tumultuous nine days both at home and abroad.

“[Shocks] can have very big effects on the economic performance here, including crucially for us the outlook for inflation,” Pill said in an online briefing. “There may be some things to which we need to respond quickly and I think dislocations in financial markets and so forth are a good example of that.”

While the BOE cut interest rates for the second time this year on Thursday, it signaled it will take a cautious approach going forward, partially due to heightened uncertainty. The Monetary Policy Committee stressed that the cutting cycle will be “gradual,” with traders seeing the UK’s inflation-boosting budget and Trump’s re-election as potentially hindering policy.

Trump’s resounding victory in the US election could have major implications for prices on a number of fronts, from the war in Ukraine to global trade tensions.

“It’s one that depends on there being no big new disturbances to the economy and there are plenty of potential sources of big disturbances,” Pill said on the outlook for rates. He said the UK is vulnerable to global shocks due to it being a “small open economy,” warning that BOE guidance for more rate reductions is “conditional.”

Governor Andrew Bailey said on Thursday that it was too soon to say how a Trump administration will affect inflation. While a tit-for-tat tariffs skirmish may push up prices, it could also dent global demand, a potentially disinflationary force.

Following Thursday’s decision, traders expect the central bank to cut rates once a quarter with only a slim chance of another move in December.

Pill also said that more uncertainty made it difficult to judge the long-run neutral interest rate in the UK, where monetary policy is neither contractionary nor expansionary.

While the rate is below the current “restrictive” levels, “I wouldn’t expect it to be as low as what we’ve seen in the decade and a half leading up to the pandemic,” he said.

“So that might define a very broad range, capped at the top by somewhere like 5% and capped at the bottom by somewhere close to 0% of where the neutral rate would be. I mean of course you could look to the mid-level of that range to think about where we may be headed.”

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