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High levels of pay growth show that interest rate cuts will likely need to be “gradual”, the Bank of England’s chief economist has warned.

Huw Pill said that relatively strong pay growth, high services prices and low unemployment all suggest “there is still some work to be done” when it comes to the Bank’s job to get inflation to its 2pc target.

The Bank’s Monetary Policy Committee voted to make its second rate cut last week, bringing the Bank Rate to 4.75pc, following a slowdown in inflation from a peak of 11.1pc in October 2022 to 1.7pc in September.

But speaking at a conference hosted by UBS, Mr Pill said: “That does not mean it is job done. From our perspective, there remain some underlying inflationary pressures in the UK economy.”

While the direction of travel is clear for interest rates, cuts are “likely to be a gradual process”, Mr Pill said.

“As we saw in the labour market data that was released this morning, pay growth remains quite sticky at elevated levels, levels that, given the outlook for productivity growth in the UK, are hard to reconcile with the UK inflation target,” Mr Pill said.

Official data on Tuesday also showed that wages (excluding bonuses) rose by 4.8pc in the three months to September.

“And similarly, when you look to services prices, they are stuck at higher rates of inflation than we see in other jurisdictions,” Mr Pill added.

Chancellor Rachel Reeves’ maiden Budget, which raised public spending by £70bn, is also a “positive demand shock”, Mr Pill said.

The consumer prices index (CPI) is expected to rise above 2pc in the coming months, particularly as the October energy price cap rise pushes up people’s bills.