Andrew Bailey signals no urgent need for more rate hikes
Andrew Bailey has signaled that financial markets have erred in growing confidence over the past month that the Bank of England will need more rate hikes to keep inflation in check.
Speaking at a cost of living conference in London on Wednesday, BoE Governor said the central bank has not yet assumed that it will raise interest rates further from current 4 percent level.
While financial markets now expect interest rates to rise to 4.75% by the end of 2023, up from expectations of a peak of 4.25% in early February, Bailey said he has not seen it. anything in the data to justify a change in interest rates. opinion.
“I’ve read the evidence since our February meeting – the data we have on economic activity, the labor market and inflation – is that the economy is growing as much as we are,” Bailey said. we expect.
“Inflation has been a little weaker, activity and wages a little stronger, although I would emphasize ‘slightly’ in both cases.”
Market interest rates on 10-year government bonds fell after Bailey’s speech but did not return to their previous levels late Tuesday. Government borrowing costs over 10 years remained at 3.87%, up from 3.32% a month ago.
Samuel Tombs, chief UK economist at macroeconomics consulting firm Pantheon, said that “the market needs to price the possibility of bank rate unchanged higher” after the governor’s speech.
Bailey’s caution about persistent inflationary pressures contrasts with global financial markets, which have demonstrated more Persistent core inflation in the US and Europe next to less evidence of the possibility of a UK economic slowdown as a signal that central banks will need to raise rates further.
With little news since the BoE raised interest rates by half a percentage point to 4% in early February, Bailey warned people not to expect the bank’s core message on inflation to change.
“At this stage, I would be cautious to suggest that we are done raising bank rates or we will certainly need to do more,” he said.
“More bank rate hikes may become appropriate, but nothing has been decided yet. The incoming data will add to the overall picture of the economy and the inflation outlook, and that will inform our policy decisions.”
The market’s growing expectations for a rate hike over the past month have also been bad news for Prime Minister Jeremy Hunt as he prepares for his first term. Budget on March 15th.
Market expectations for interest rates incorporated directly into the five-year forecast of government debt servicing costs from the Office of Budget Responsibility, the financial watchdog, are no longer much lower than the rates used. used in the November Fall Declaration.
The BoE still expects inflation to fall rapidly this year although prices will remain much higher, with a faster rate of decline in April when energy bills are forecast to grow much less than last year. .
Bailey said a smaller increase won’t ease households’ cost of living hardship because prices themselves haven’t fallen. As a result, he added, the BoE has had to “carefully monitor” how the steep rise in interest rates to 4% over the past 15 months is “impacting the economy to the price levels consumers face.”
“We need to adjust monetary policy carefully to bring inflation back to a sustainable target, although he added that if inflation looks more persistent, the BoE will need to raise rates,” Bailey said. more capacity.
“If we do too little now with interest rates, we will have to do more later. The experience of the 1970s taught us that important lesson.”