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Bank of England’s Bailey Says Risk of Persistent Inflation Is Receding in UK - BLOOMBERG
(Bloomberg) -- Bank of England Governor Andrew Bailey said it is “too early to declare victory” over inflation but the risks of persistent inflation appear to be receding, a sign he’s growing more confident about further interest rate cuts.
Bailey said the “second round inflation effects appear to be smaller than we expected” and that “we are now seeing a revision down in our assessment of that intrinsic persistence, but this is not something we can take for granted,” according to a text of a speech he’s due to deliver Friday in Jackson Hole, Wyoming.
His comments appeared to suggest the BOE is growing increasingly comfortable with the inflation outlook. The UK central bank lowered its benchmark lending rate by a quarter point earlier this month to 5%, the first reduction since the start of the pandemic.
His words offered no guidance on whether BOE officials will move again in September, when the US Federal Reserve is on track to join with loosening. Investors expect another cut from the BOE in November to 4.75%, pricing the chances of a move next month at just one-in-five.
Instead, he reiterated the BOE’s guidance from November that some degree of restrictiveness in policy will have to remain until inflation is fully subdued. Before the last cut, the BOE said rates are tight enough that they’d bear down on the economy even if they’re lowered. The comments leave the impression that officials will move slowly in making reductions and keep an eye on how data is responding.
“We are not yet back to target on a sustained basis,” Bailey said. “Policy setting will need to remain restrictive for sufficiently long until the risks to inflation remaining sustainably around the 2% target in the medium term have dissipated further. The course will therefore be a steady one.”
Sterling had risen 1% after Fed Chair Jerome Powell said Friday that “the time has come for policy to adjust,” all but confirming lower rates are on the way in the US next month.
The pound held onto the gains following Bailey’s comments, trading at its highest in more than two years and lurching above $1.32. The European Central Bank eased borrowing costs in June and is expected to move again in September.
Having brought UK inflation down from its peak of 11.1% in late 2022, the BOE expects it to rebound by the end of the year. Inflation dropped to the 2% target in May, where it remained in June.
It rose to 2.2% in July and the BOE sees it bouncing back to 2.8% by December due to higher energy bills. On Friday, the regulator Ofgem announced that household bills will increase by 10% in October to £1,717 ($2,271.2) for the typical household.
Despite the anticipated pick-up in price growth, Bailey appeared sanguine. “The economic costs of bringing down persistent inflation – costs in terms of lower output and higher unemployment – could be less than in the past,” he said in the text. The BOE anticipates a lasting fall in inflation back to the 2% target in 2025.
“This is consistent with a process of disinflation which is steady and more in keeping with a soft landing than a recession induced process,” Bailey added. The UK economy has proved more resilient this year than expected, and inflation expectations “appear to be better anchored,” he said.
--With assistance from Andrew Atkinson.
(Updates with market reaction, context and comments from the speech.)
