The Bank of England’s chief economist has warned against cutting interest rates “too far or too fast”, a day after the governor, Andrew Bailey, said the central bank could move “more aggressively” to lower borrowing costs.

Huw Pill said there should be a gradual reduction in interest rates to make sure inflation remains near the Bank’s 2% target.

The pound, which fell steeply on Thursday after Bailey’s comments in an interview with the Guardian, initially recovered some of its losses on Friday, before falling again to a fresh three-week low of $1.307.

Analysts said the dollar was helped by a rise in job creation across the US after non-farm payrolls increased by 254,000 in September – more than 100,000 higher than had been expected. The unemployment rate also dipped to 4.1%, down from the 4.2% in the previous month, suggesting there was likely to be a delay to further interest rate cuts by the Federal Reserve.

Pill, who sits on the Bank’s nine-member interest rate setting committee chaired by Bailey, said: “While further cuts in Bank rate remain in prospect should the economic and inflation outlook evolve broadly as expected, it will be important to guard against the risk of cutting rates either too far or too fast.”

Speaking in London at the Institute of Chartered Accountants in England and Wales, he added: “For me, the need for such caution points to a gradual withdrawal of monetary policy restriction.”

Pill said he feared a return of inflation after the recent cost of living crisis, which depressed the incomes of many households.

“The recent cost of living crisis was a salutary reminder of the dislocation and pain inflation imposes, especially on the less well-off and small and medium-sized enterprises – already vulnerable segments of the economy that may struggle to protect themselves from higher prices,” he said.

“On this basis, price stability should not be seen as the obsession of remote technocrats in Threadneedle Street. Rather price stability is a foundation – you could even argue, the foundation – of a thriving, modern, vigorous and growing UK market economy, which provides opportunities for all: precisely what I would envisage as an ‘economy fit for the future’,” he added.

Bailey had told the Guardian that the Bank could become a “bit more aggressive” in cutting interest rates provided inflation data remained on track.

The pound lost almost 2% of its value as investors bet that interest rates in the UK would be cut at a faster pace over the next year than previously expected, offering lower returns on savings.

The Bank’s monetary policy committee (MPC) last month voted to leave interest rates at 5%, after a quarter-point cut in August. Markets are pricing in another quarter-point cut to 4.75% at the MPC’s November meeting.

Structural changes in the economy after the Covid-19 pandemic and the Ukraine war were uppermost in his mind, Pill said.

The increase in the number of people leaving the labour market because of ill health has alarmed many policymakers who are concerned it will force employers to bid up wages as they compete for a smaller pool of skilled workers.

Pill said: “I remain concerned about the possibility of structural changes sustaining more lasting inflationary pressures.”