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Andrew Bailey warned markets that they were underestimating the persistence of UK inflation, as the Bank of England governor stressed it was too soon to start cutting interest rates.
Bailey told MPs on Tuesday that investors were putting “too much weight” on current data releases that show a fall in headline inflation.
Swaps markets are pricing in that the BoE will make its first interest rate cut from 5.25 per cent in June next year, and expect 0.7 percentage points of cuts over 2024.
“We are concerned about the potential persistence of inflation as we go through the remainder of the journey down to 2 per cent,” Bailey told the Treasury committee. “And I think the market is underestimating that.”
However, he said the BoE’s current policy approach should be sufficient to get inflation back to its 2 per cent target over time.
Headline consumer price inflation fell to 4.6 per cent in October, down from 6.7 per cent the previous month, driven by the impact of falling energy prices.
But the BoE has stressed it is more focused on wage growth and measures of inflation such as services prices, which could point to more stubborn inflation.
The central bank’s latest forecasts, released earlier this month as it held interest rates steady, pointed to annual growth in the consumer price index falling below target only at the end of 2025.
Other big central banks are also pushing back against market expectations that rates are set to fall soon.
Christine Lagarde, president of the European Central Bank, earlier this month told the Financial Times that she was not expecting rate cuts for at least “the next couple of quarters” even after the ECB held rates in its latest meeting.
Sir Dave Ramsden, one of the BoE’s deputy governors, told the Treasury committee that the bank was “distancing” itself from market expectations, pointing to indicators such as elevated services inflation, as he explained why the bank’s key rate was being held at the current level.
The comments come after the bank’s chief economist, Huw Pill, stoked up market expectations that interest rates would fall next year by suggesting investor expectations for cuts halfway through next year were not “unreasonable”.
Despite some easing in inflation and wage numbers, Bailey said the BoE was still focused on the risk that inflation would remain stronger than expected in the coming months
The BoE has previously warned about inflation risks stemming from the Israel-Gaza conflict. In the bank’s latest set of forecasts, it downgraded its assessment of the UK economy’s potential to expand without driving an increase in prices.
Additional reporting by Mary McDougall
Source: Economy - ft.com
