Bank of England's Pill says latest UK data is disappointing

Bank of England Chief Economist Huw Pill said on Thursday that the latest data on the economy, including a stagnation of gross domestic product in February, is "somewhat disappointing" even if it remains better than forecast by the BoE late last year.

Pill, speaking at an online event hosted by MNI Connect, said GDP data published earlier on Thursday and other measures of output were relatively flat and at levels close to pre-pandemic levels.

"That is of course somewhat disappointing from an overall point of view, but I think it is important to recognise that that profile is much better than what we had in the MPC's forecasts in the second half of last year," he said.

Last month the BoE raised its key interest rate to 4.25% from 4% - its 11th consecutive rate rise since starting to tighten policy in December 2021 - and financial markets see a roughly 64% chance of a further rate rise to 4.5% in May.

Pill - one of the Monetary Policy Committee's (MPC) nine members - also said inflation may be "bumpier than we expect" but was still expected to fall in the second quarter as last year's surge in energy prices drops out of annual comparisons.

British consumer price inflation unexpectedly rose to 10.4% in February and last week Pill said the central bank still needed to "see the job through" on monetary policy tightening, though he did not directly commit to a further rate rise in May.

The BoE has also highlighted how the economy has yet to feel the full force of its past interest rate rises, and two of its policymakers think the central bank has already over-tightened.

However, Pill said it was wrong to focus on BoE forecasts which show inflation well below 2% in two years' time - a metric which the central bank has often used in the past as a signal that policy is too tight.

"I think that framework is a little simplistic," he said.

Instead, policymakers needed to consider the risk that recent very high inflation had broken the linear relationships between economic variables which the BoE's main forecasting models are based on, he said.

On Tuesday, the International Monetary Fund upgraded its outlook for Britain's economy but still expects it will contract more this year than in any other major Western economy.

In his comments on Thursday, Pill said British wage growth appeared to be slowing and that the inflation-neutral level of unemployment was probably higher than before the coronavirus pandemic.