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Bank of England governor Andrew Bailey has pushed back against market speculation about the prospect of interest rate cuts, insisting it is too soon to discuss easing policy given the continued risk posed by inflation.
Bailey said that while inflation would fall sharply in the coming months because of falls in energy prices, monetary policy needed to remain restrictive for an extended period of time, adding that “upside risks” to inflation remained, including the threat of regional conflict in the Middle East.
“Our forecast suggests inflation will be back at target in around a two-year horizon,” said Bailey. “I am optimistic — I think it will happen. But I’m afraid we have got to continue to do the work to make it happen.”
Bailey was speaking after his colleague, the Bank of England chief economist Huw Pill, earlier this week suggested it was reasonable for markets to expect rate cuts from the middle of next year. Bailey did not comment on whether the interest rate outlook being priced in by financial markets was well-founded.
“The market will of course reach a view — it has to reach a view on the future path of interest rates. I totally understand that,” said Bailey. “But we are very clear we are not talking about that. We are saying policy has to be restrictive for an extended period.”
The BoE this month kept its key rate at 5.25 per cent, joining other systemically important central banks including the Federal Reserve and the European Central Bank in leaving rates on hold.
Policymakers are seeking to tamp down speculation about near-term cuts as they push back against investors who might otherwise drive down yields and loosen financial conditions, undermining the campaign to limit price growth.
Bailey was speaking at a conference organised by the Central Bank of Ireland in Dublin. At the same event, European Central Bank governing council member Gabriel Makhlouf echoed Bailey’s message saying it was “far, far too early” to start talking about when rates could be cut. “It’s also too early to declare that we’ve reached the top of the ladder” on rate increases, he added.
There was, he said, a historical pattern of victory over inflation being declared too soon.
In his speech to conference delegates, Bailey warned of the risks stemming from the “fragmentation” of the global trading system, adding that Brexit had led to a reduction in the “openness” of the British economy.
He argued that global fragmentation carried risks to financial stability and called for strong international co-ordination on regulatory policy.
Bailey also singled out the risks of fragmenting the activities of clearing houses, a sensitive topic given the UK’s resistance to EU attempts to repatriate some of this business from London and into the single market. Clearing houses stand between two parties and ensure a deal is completed in the event one side defaults.
“Fragmenting this type of market infrastructure creates rather than reduces risks in markets. It also increases the cost of market functioning,” Bailey said.
Source: Economy - ft.com
