The pound fell and gold yields eased as Andrew Bailey hailed “good news” on inflation that could pave the way for interest rate cuts this spring.
In a closely watched report that analysts said was “keeping alive” hopes of lower borrowing costs, the Office for National Statistics said inflation remained firm at 4 percent in January.
That defied forecasts that inflation would rise and will be greeted with relief by Bank of England Governor Bailey, as well as Rishi Sunak and Jeremy Hunt in Downing Street.
“As far as I know, it’s good news,” Bailey told the House of Lords economic affairs committee when asked about the figure.
With inflation expected to fall sharply in the coming months, having fallen from a peak of 11.1 percent in the fall of 2022, analysts said a spring rate cut was on the cards.
Relief: Bank of England Governor Bailey (pictured) hailed new Office for National Statistics figures showing inflation held steady at 4%.
That looked highly unlikely before the ONS report was published after worrying figures 24 hours earlier showed wages rose more than expected.
The 6.2 per cent rise in wages raised fears that the Bank will not cut rates until much later in the year, meaning misery for millions of borrowers with mortgages.
That pushed up the pound and lifted bond yields in bond markets as investors reduced their bets on interest rate cuts.
But inflation data reversed that trend, with the pound falling again towards $1.25 and below 1.17 euros.
Bond yields (key measures of public borrowing costs) also fell from recent highs.
Thomas Pugh, an economist at consultancy RSM UK, said: “Insufficient inflation is keeping hope of rate cuts alive.”
He added: “Inflation is clearly falling much faster than expected and the rise in prices due to the pandemic and energy crisis will soon be a bad memory.”
“In fact, we still expect inflation to fall below 2 percent as early as April, which would open the door wide to an interest rate cut in the spring or early summer.”
The Bank’s Monetary Policy Committee raised rates on 14 consecutive occasions between December 2021 and August 2023, from a record low of 0.1 percent to a 15-year high of 5.25 percent.
With inflation falling sharply since then, despite a small rise from 3.9 percent in November to 4 percent in December, speculation is growing about an interest rate cut.
And although inflation is double the 2 per cent target, it is expected to fall this spring when energy regulator Ofgem reduces the cap on households’ gas and electricity bills.
Weak growth has fueled pressure for a rate cut. Today’s figures will show whether the UK fell into recession in the second half of 2023.
Samuel Tombs, economist at Pantheon Macroeconomics, said: “Inflation remains likely to fall to around 2 percent in April and then modestly reach the 2 percent target over the next six months.”
It seems a matter of chance whether the committee will choose to reduce the Bank’s interest rate for the first time in May or June.’
Julian Jessop of the Institute of Economic Affairs said the Bank was likely to slash rates amid the threat of recession and deflation.
He said: “Rates will probably remain stable until May, but when the Bank acts it will probably do so quickly, with rates ending the year at around 4 per cent.”