(Bloomberg) -- The Bank of England will be able to cut interest rates “some time over the summer” if second round inflation pressures drop away as expected, Deputy Governor Ben Broadbent said.

In his last speech after 13 years at the UK central bank, Broadbent signaled that the decision to cut rates from the current 16-year high of 5.25% would hinge on the stickiness of wage growth and whether businesses pass higher payroll costs through to prices.

The faster real wages make up ground lost during the inflation shock, the sooner a “norm” will return and the quicker these second-round inflation pressures will recede, the official who oversees monetary policy at the BOE argued in a speech.

Earlier this month, BOE Governor Andrew Bailey hinted that a first quarter-point cut could come as soon as June 20, the next meeting and Broadbent’s last before stepping down. Official figures on Wednesday are expected to show inflation dropped to within a whisker of the 2% target in April. The BOE will have one more set of both inflation and pay data before the next vote.

“If things continue to evolve with its forecasts – forecasts that suggest policy will have to become less restrictive at some point – then it’s possible Bank Rate could be cut some time over the summer,” Broadbent said in a speech in London.

Former BOE rate-setter Michael Saunders later wrote in a note for Oxford Economics, where he is senior economic adviser, that he believes the bank faces “a narrowly-balanced choice between June and August,” for the first cut. The BOE, he argued, can break from past experience and move before the US Federal Reserve.

“Unlike the US, UK inflation in recent quarters has undershot the central bank’s expectations and is likely to return to target in the next month or two,” Saunders wrote. “What’s more, recent economic growth has been much weaker in the UK than the US, and as a result, labor market tightness has faded faster in the UK.”

The Swiss National Bank and Sweden’s Riksbank have already cut, and the European Central Bank is expected to do so in June. Saunders expects three quarter-point reductions from the BOE to 4.5% this year.


Answering questions following his speech, Broadbent said that the economy’s behavior in the last six months has been “reassuring,” though policymakers are still “wary” after the double-digit surge in inflation.

The drop in inflation toward target, from a high of 11.1% in late 2022, has largely been mechanical. It’s the result of plunging energy prices and slowing growth in food prices – neither of which are within the BOE’s control, Broadbent said.

“The pass-through of the ups and downs in tradeable prices have since accounted for most of its decline as well. What we’re now left with are the more persistent, second-round effects of that earlier surge on domestic inflation. How long these persist is unclear,” he said.

One of the key assumptions the nine-strong MPC has made is that second-round inflation, in higher wages and sticky services prices, will take longer to squeeze out of the system than it did to emerge. Broadbent said that judgment is now under examination.

“If the process were entirely symmetric then you might expect these effects to unwind relatively quickly, within the next year or so,” he said. 

He suggested that a fast recovery in real pay could speed up the disinflationary process. “If the origin of these second-round effects is the squeeze in real incomes in 2022, their recovery this year may matter. The more that’s regained, the less ground, relative to some notional ‘norm,’ there is to make up,” Broadbent said.

Real pay “will grow significantly this year,” one of the charts in his presentation said. Broadbent also pointed to the BOE’s regional survey of businesses, which found that employers believe earnings growth will remain elevated this year but that companies will be “less able than they did last year to pass through in full these higher wage costs.”

He also said in the Q&A that climate change may cause inflation shocks in the future, including making food prices more “variable.” The MPC has discussed the possibility that the huge investments needed for the climate transition and the “demand that puts on financing would push up the real neutral level of interest rates,” Broadbent added.

--With assistance from Irina Anghel.

(Updates with Q&A remarks and comments by ex-MPC member Michael Saunders)

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