LONDON (Reuters) - The Bank of England will need to look beyond the temporary inflation boost from last week's budget but must keep a close eye on anything that might add to longer-term price pressures, BoE Chief Economist Huw Pill said on Friday.
The BoE estimated on Thursday that budget measures including greater spending, higher bus fares and tax increases for employers and private schools would add nearly 0.5 percentage points to inflation at its peak in around two years' time.
However, Governor Andrew Bailey said that he did not expect the budget to heavily affect the central bank's path of interest rate cuts and Pill said it was just one of a range of factors.
"To a large extent, we will have to look through and interpret (budget measures) in a way that allows us to have a good sight of these underlying and more persistent components of inflation that really have to be the focus of what's driving our policy decisions," Pill said in a BoE briefing for businesses.
BoE Monetary Policy Committee members, including Pill, voted 8-1 in favour of cutting the central bank's main interest rate to 4.75% from 5% on Thursday as headline inflation had fallen below its 2% target and longer-term inflation pressures continued to ease.
However, the BoE has been slower to cut rates than the U.S. Federal Reserve or the European Central Bank. And after the budget, investors scaled back their expectations for BoE rate cuts next year to just two or three.
This contrasts with earlier market expectations of four quarter-point rate cuts, which the BoE used as a basis for its latest growth and inflation forecasts.
Pill, like Bailey, declined to be drawn on whether the "gradual" pace of rate cuts which the BoE says is likely was best understood as one rate cut every three months.
"Nothing is set in stone," he said. "I'm not going to sort of make a judgment (on) how frequent 'gradual' means or how infrequent 'gradual' means. Gradual means gradual in this context."
(Additional reporting by Suban Abdulla; Writing by David Milliken and Alison Williams)
By Andy Bruce