Andrew Bailey hints interest rates have peaked as PMI shows supply chains easing

Andrew Bailey hinted today that interest rates may already be at their all-time high as a closely monitored study showed pressures on the supply chain are easing.

Speaking at a conference on the cost of living, the governor of the Bank of England admitted that inflation “remains far too high” for households and businesses.

But he pointed out that the Bank has forecast it to fall sharply this year, and suggested data so far support that view.

Stressing that “nothing has been decided yet” and that interest rates would still have to rise from the current 15-year high of 4 percent, Bailey stressed that this was not “inevitable.”

The comments came as the S&P Global and CIPS Purchasing Managers’ Manufacturing Index score (PMI) showed that the sector was stabilizing.

It came in better than expected at 49.3 in February, compared to 47 in January and 45.3 in December. Anything below 50 represents a contraction.

It showed that “supplier lead times” – the period between the order being placed and the supplier being ready for shipment – ​​had been reduced last month for the first time since June 2019.

That trickled down to prices, meaning the rate at which the prices of goods and materials that manufacturers buy have slowed.

The Purchasing Managers’ Index performed better than expected at 49.3 in February, compared to 47 in January and 45.3 in December. Anything below 50 represents a contraction

The Bank of England raised interest rates from 3.5 percent to 4 percent last month

In his speech, Mr. Bailey: ‘A further increase in bank interest rates may prove appropriate, but nothing has been decided yet.

“The incoming data will contribute to the overall picture of the economy and the outlook for inflation, which will inform our policy decisions.”

He added: “At this stage I would caution against suggesting that we are done raising bank rates, or that we will inevitably have to do more.”

He warned that the bank is facing a difficult balancing act, adding: “If we do too little with interest rates now, we will only have to do more later. The experience of the 1970s taught us that important lesson.

“But second, we also need to keep a close eye on how the tightening we’ve already implemented works through the economy to the prices consumers face.”

He told the London conference that the bank’s move to raise rates from 0.1 percent in December 2021 to 4 percent does not currently immediately reflect the “unprecedented” rises in food prices or the energy bill shock many households are facing. faced in the past year can mitigate. Russian invasion of Ukraine.

“People wouldn’t have to worry about inflation this way,” he said.

“I am afraid that monetary policy cannot remove the shock to our national real income.

“But what monetary policy can – and must – ensure that the inflation that comes at us from abroad does not become permanent inflation that is generated domestically.

‘Inflation that we make ourselves will not make us any better as a country. Those with weak bargaining power will fall further behind.

“That’s why we raised bank interest.”

UK inflation has fallen to 10.1% from a peak of 11.1% in October last year, thanks to sharply lower wholesale energy prices and last year’s high prices being discounted.

Mr Bailey said markets expect energy prices to fall further in 2023 and Ofgem’s price cap is likely to fall below the government’s energy price guarantee – set at £3,000 from April – but stressed that the outlook for 2024 is “more uncertain ‘ are.

“User bills will have a direct impact on overall annual consumer price inflation,” he said.

‘But as you can see, this doesn’t mean we can expect household energy bills to return to previous levels any time soon.

And from a cost-of-living point of view, it’s what people pay that matters.

‘There will be some relief, but the energy bill remains a challenge for many people, especially those on lower incomes.’

Markets responded to the speech by lowering interest rate expectations.

The manufacturing PMI showed that the UK remained in negative territory, but the rate of that decline has slowed since hitting a 31-month low in December.

“Input prices rose at their slowest pace since July 2020 and supplier performance improved for the first time in three and a half years,” said Rob Dobson, director of S&P Global Market Intelligence.

“This offset some of the lingering negative effects of strikes, the cost-of-living crisis and lower order intakes.”

The Bank expects a dramatic drop in inflation early next year

He added: “Manufacturers benefited from growing signs of a global economic recovery and China’s easing of Covid restrictions.

“This process of economic revival, alongside signs of inflation spikes and reduced recession fears, should hopefully help UK manufacturers deliver further growth in the coming months.”

Dr. John Glen, chief economist at the Chartered Institute of Procurement & Supply, said: ‘Driven by improvements in supply chain deliveries and more stable price increases, the manufacturing sector reported a more positive assessment of the state of affairs for makers in February and output rose for the first time in eight months. ‘