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BOE’s Bailey Signals Expectation of Four Rate Cuts Next Year - BLOOMBERG
(Bloomberg) -- Bank of England Governor Andrew Bailey signaled that policymakers still believe four quarter-point interest rate cuts next year is the most likely scenario as he said inflation has come down “faster than we thought it would.”
In an interview for the Financial Times Global Boardroom event, recorded on Monday, Bailey accepted that the market path in the BOE’s November forecast was conditioned on four rate cuts, which did bring inflation in line with the bank’s 2% target. Traders lifted bets on further rate cuts after the comments.
“We always condition what we publish in terms of the projection on market rates, and so as you rightly say, that was effectively the view the market had,” Bailey said. Asked whether four rate cuts was consistent with the BOE’s central planning scenario, Bailey replied: “Yes.”
Investors priced in further rate-cuts after the FT report of the event, moving to price in four quarter-point rate cuts next year. However, the move pared as traders digested the conditional nature of Bailey’s recorded comments. The pound, which initially fell to a session-low $1.263, reversed its decline to trade around $1.268.
Money markets are now pricing around 83 basis points of easing through to the end of 2025, implying investors are split between three or four rate cuts. That compares to 82 basis points before Bailey spoke.
The governor also repeated that inflation has fallen faster this year than had been forecast but warned that the budget in October and the threat of a global trade war spurred by Donald Trump’s win in the US presidential election complicate the outlook.
The BOE may need to wait until the second quarter to determine whether businesses will use price rises or job cuts to recover much of the £26 billion in extra national insurance payroll tax contributions they’re liable for after Chancellor of the Exchequer Rachel Reeves’ budget. “As we go into spring, we will have a better sense of where it’s heading,” Bailey said.
In an unusual intervention, Bailey welcomed elements of Reeves’ budget, in which she raised taxes by £40 billion a year and increased borrowing for investment to repair Britain’s public services and boost growth.
The BOE chief said it had been evident that there was some government overspend on day-to-day public services as official monthly data was running higher than forecast, requiring some action. “There were clearly issues that had to be dealt with,” he said.
Bailey said it was not immediately obvious how a trade war would impact inflation in the UK because the price reaction would depend on the response. Trade diversion to the UK could lower prices while tit-for-tat tariffs might raise them. US president-elect Donald Trump — who takes office in January — has promised tariffs against China, Mexico and Canada and threatened them elsewhere.
Bailey also warned lawmakers against pushing too hard on financial deregulation. “There isn’t a trade-off between financial stability and growth,” he said.
