[ad_1]
Stay informed with free updates
Simply sign up to the UK inflation myFT Digest — delivered directly to your inbox.
Andrew Bailey has warned markets against underestimating the persistence of UK inflation and stressed he expected the Bank of England would keep interest rates high for an extended period of time.
The BoE governor told MPs on Tuesday that investors were putting “too much weight” on recent data that showed a sharp fall in headline inflation in October.
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 during 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 select committee. “And I think the market is underestimating that.”
Investors are betting on rate cuts next year as they watch signs of weakening UK economic activity alongside a decline in headline consumer price inflation, which fell to 4.6 per cent in October from 6.7 per cent the previous month.
The BoE has attempted to downplay the significance of the recent drop in CPI growth, saying it is more focused on wages and measures of underlying inflation such as services prices that point to stubborn inflationary pressures.
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, 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.
Federal Reserve chair Jay Powell has warned against the risk of being “misled” by favourable US data on prices, saying the mission to return inflation to the central bank’s 2 per cent target had a “long way to go”.
In his testimony to the committee, Bailey said the BoE’s current policy approach should be sufficient to get inflation back to its 2 per cent target over time. But he insisted that for the time being growth in wages and services prices remained too high, and that there was an “upside” risk that inflation will be 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, which Bailey said could lead to more persistent inflation.
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 came after the bank’s chief economist, Huw Pill, earlier this month stoked up market expectations that interest rates would fall next year. Pill had suggested investor expectations for cuts halfway through next year were not “unreasonable”.
Catherine Mann, one of the more hawkish members of the BoE’s Monetary Policy Committee, said in a written report to lawmakers on Tuesday that the prospects for more persistent inflation imply “a need for tighter monetary policy”.
Financial conditions had eased between the bank’s August and November forecasting rounds, she said.
“While I acknowledge that the monetary policy stance has started becoming restrictive, it is so only recently and not by so much,” Mann added.
Mann was one of three policymakers who voted for a quarter-point rate increase in the bank’s November meeting. The majority of the MPC favoured keeping the key rate unchanged.
Additional reporting by Mary McDougall
[ad_2]
Source link
