Bailey warns that talk of cuts is premature as the Bank freezes interest rates at 5.25%
Andrew Bailey said last night that he expects another “notable” fall in inflation this autumn, but said it was too early to discuss interest rate cuts.
Speaking after the Bank of England left rates unchanged after almost two years of increases, the governor described this week’s figures showing inflation fell in August as “a very pleasant surprise”.
The drop in inflation from 6.8 percent to 6.7 percent last month defied expectations of a rise to 7 percent or higher and apparently paved the way for yesterday’s decision to leave interest rates at 5 ,25 percent.
“It was a very pleasant surprise,” Bailey told LBC Radio. “I expect the next notable drop to be in the October figure released in November.”
The expected fall in inflation coincides with the expected fall in the peak energy price from £2,074 to £1,923 in October.
Inflation shock: Speaking after the Bank of England left rates unchanged, Governor Bailey (pictured) described this week’s figures showing inflation fell in August as “a very pleasant surprise”.
But while inflation has slowed from a peak of 11.1 percent last October, it remains well above the 2 percent target.
The Bank insisted the door was open to further rate hikes if price pressures persisted.
He said rates would have to remain “sufficiently restrictive” for as long as it takes for inflation to return to target.
“I can tell you we haven’t had any discussions about lowering rates because that would be very, very premature,” Bailey said.
The 64-year-old central banker said he was “watching the oil market very closely” amid fears that rising crude prices could boost inflation towards the end of the year.
Oil rose above $95 a barrel this week for the first time in ten months, raising the cost of fuel for both motorists and airlines.
But while the Bank said further rate hikes were still possible, many observers believe yesterday’s hike will be the last.
But analysts do not expect a rate cut anytime soon. Huw Pill, the Bank’s chief economist, said last month that the strategy would likely resemble Table Mountain in South Africa, suggesting rates would remain at their peak for some time rather than rising rapidly and then falling sharply.
George Buckley, an economist at investment bank Nomura, said it’s no longer a question of “how far” rates will rise, but “how long” they will stay there.
“The Bank is marketing this decision as a pause, at least for the moment,” he said.
“Further increases may still be necessary,” he said. But our view is that the pause will eventually become a full stop, and that August will prove to have been the last policy adjustment of this cycle by the Bank.’
He added: “We see rate cuts in the second half of 2024.”
But others suggested the Bank would need to cut rates sooner to avoid recession if the economy continues to weaken.
Investec economist Philip Shaw said: “We suspect we are now at peak rates and the MPC will begin to ease policy in mid-2024.” Kallum Pickering, an economist at Berenberg, said the first cut would likely come in the second quarter of next year and rates would fall to 4 percent by the end of 2024.
Sterling takes a beating
The pound fell for the second day in a row after the Bank of England froze interest rates.
Sterling fell below $1.23 for the first time since March, falling as low as $1.2239 before recovering slightly.
It was the second day of declines and brought losses since mid-July to around 7 percent.
The pound fell sharply on Wednesday after official figures showed inflation fell from 6.8 percent to 6.7 percent in August, contradicting expectations it would rise to 7 percent or more.
That reading turned out to be the catalyst for yesterday’s rate freeze, further weakening the currency.
It also lost ground against the euro, reaching 1.1508 euros.
Bond yields – a key measure of government borrowing costs – remained elevated as investors bet that interest rates would stay high.