Huw Pill told Parliament’s Treasury Committee on Tuesday that the Bank of England has, in the past, placed too much weight on inflation being close to target, rather than focusing enough on future risks.
He said the labour market is showing signs of stabilisation, while disinflation has been slower than expected.
Inflation Risks Still Skewed Higher
Pill said he sees upside risks to inflation and that caution is needed. He added that efforts to bring down inflationary pressures remain necessary.
Given the view that future inflation risks are being underestimated, we should be cautious about betting on imminent or deep interest rate cuts. The Bank of England is signalling that it needs to keep bearing down on inflationary pressures. This suggests monetary policy will remain tighter for longer than many currently expect.
This cautious stance is justified when we look at the data from last year. We saw how UK inflation proved stubborn throughout 2025, remaining near 4% for a sustained period, which was double the Bank’s official 2% target. This slow pace of disinflation supports the need for continued vigilance today.
The labour market also continues to present an upside risk to prices. We remember seeing wage growth figures persisting above 6% in 2025, a level that is fundamentally inconsistent with a 2% inflation target. A stable but tight jobs market means these wage pressures could easily reignite broader inflation.
Implications For Rates And Sterling
For derivative traders, this points towards positioning for UK interest rates to stay higher for longer. This could involve selling Sterling Overnight Index Average (SONIA) futures contracts for the coming months, a strategy that profits if expected rate cuts do not materialize. The risk is that the market is currently pricing in a path of easing that now seems too optimistic.
This policy outlook should also be supportive for the pound. A central bank that is more worried about inflation than its peers tends to preside over a stronger currency. Therefore, buying call options on GBP against currencies with a more dovish central bank outlook could be a logical trade.
