Huw Pill told Parliament’s Treasury Committee on Tuesday that the Bank of England has, in the past, put too much focus on inflation being close to target, and not enough on future risks.
He said the labour market is showing signs of stabilising, while disinflation has been slower than expected.
Inflation Risks Still Skewed Higher
Pill said inflation risks are tilted to the upside and that caution is needed. He added that work to reduce inflation pressures is still necessary.
If future inflation risks are being underestimated, then it may be too soon to expect rapid or large interest rate cuts. The Bank of England is signalling that it must keep putting downward pressure on inflation. This suggests monetary policy could stay tighter for longer than many expect.
This cautious view fits last year’s data. UK inflation stayed stubborn through 2025, hovering near 4% for a long period. That is about twice the Bank’s 2% target. The slow pace of disinflation supports the case for continued vigilance today.
The labour market also remains a source of upside risk for prices. In 2025, wage growth stayed above 6%, a pace that does not align with a 2% inflation target. Even if the jobs market is stable, it can still be tight. That means wage pressures could feed back into wider inflation.
Implications For Rates And Sterling
For derivative traders, this points to positioning for UK interest rates to remain higher for longer. One approach is selling Sterling Overnight Index Average (SONIA) futures for the coming months. This can profit if expected rate cuts are delayed or fail to appear. The risk is that markets may still be pricing in an easing path that now looks too optimistic.
This policy outlook may also support the pound. A central bank that is more focused on inflation than its peers often supports a stronger currency. In that case, buying call options on GBP versus currencies where the central bank outlook is more dovish could be a logical trade.
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