A deputy governor of the Bank of England has said “caution remains appropriate” in fiscal policy decisions despite a slowdown in UK inflation in recent months.
Wages are still growing too fast for inflation to sustainably come down to the 2% target, said Clare Lombardelli, deputy governor for monetary policy.
She also warned that global growth will be knocked by US tariff plans, which will also reduce inflation.
Last week, Ms Lombardelli was among members of the Bank’s Monetary Policy Committee (MPC) who agreed to reduce UK interest rates to 4.25% – the lowest level for two years.
The Bank also increased its economic growth forecast for 2025 after a strong start to the year, but downgraded growth prospects for next year.
On Monday, the deputy governor told the Bank of England Watchers Conference in London that she was “balanced between holding and cutting rates” but ultimately supported a cut amid “gradual disinflation”.
Most recent official figures showed that UK inflation slowed to 2.6% in March, from 2.8% in February, bringing it closer to the Government and the Bank’s 2% target rate.
However, inflation is expected to have accelerated to around 3.4% in April after a jump in energy and utility costs.
Recent data also showed that average weekly pay grew by 5.9% over the three months to February.
Ms Lombardelli said: “Monetary policy is still restrictive and the current stance reflects a balance between the need to continue to squeeze out underlying inflationary pressure and managing the risks of lower demand in the economy.
“Wage growth is still too high to be consistent with inflation at target.
“Caution remains appropriate. I’ll be more comfortable when I see material deceleration in the data over a longer period.”
She added that recent US tariff plans and heightened trade tensions globally could press UK inflation lower.
Ms Lombardelli said: “Higher tariffs and more uncertain US policies will likely reduce growth and inflation over the policy-relevant horizon because of reduced demand and trade diversion from reduced exports by the rest of the world to the US.
“The exchange rate movements we have seen further support lower imported inflation to the UK, although exchange rates can shift in response to trade policy news and the evolution of global risk sentiment.”
Meanwhile, fellow MPC member Megan Greene also said she had some concerns about inflation persistence in the UK.
“There is a sense that maybe households in particular are a bit more sensitive to increases in inflation,” she said on a panel at the Watchers Conference.
“What’s a bit more worrisome for me is that medium-term inflation expectations have also started ticking up.”
Also touching on recent trade policy, Ms Greene said that the heightened uncertainty leading to businesses adopting a “wait and see” approach has a “cooling effect on growth” in the economy.
Ms Greene, who also voted for a 0.25 percentage point rate cut on Thursday, said she had been “quite torn” over whether to reduce rates or keep them the same, balancing concerns over inflation expectations with the trade policy impact.
But the policymaker insisted her decision would not have changed had she known about the new trade agreements the US has struck with the UK and China since then.
She added that she was “worried that trade diversion might be more disinflationary than we have in our inflation forecasts, and I think that’s still the case even if China and US tariffs are lower for 90 days”.
Alan Taylor, another member of the MPC, who earlier in May voted for a half-point cut, added on Monday afternoon that he also thought the tariffs would reduce inflation.
He said the global uncertainty will “amplify the wait and see and precautionary dynamics for households and businesses everywhere, not just here”.
“But also, importantly, the trade diversion mechanism where… the US is a deficit country in the world, and so there are surplus countries who are trying to get their goods in the short run.”
He added: “Where are those exports going to land? That’ll put downward pressure on us and on our import prices.”
Mr Taylor said: “I’m putting quite a lot of weight on the news of the last month, because it’s been very big news. And I think the international dimension for me is quite perilous, right now.”
