Jerome Powell, chairman of the US Federal Reserve, right, and Andrew Bailey, governor of the Bank of England (BOE), during the Kansas City Federal Reserve's Jackson Hole Economic Policy Symposium in Moran, Wyoming, US, on Friday, Aug. 23, 2024. Powell said the time has come for the Federal Reserve to cut its key policy rate, affirming expectations that officials will begin lowering borrowing costs next month and making clear his intention to prevent further cooling in the labor market. Photographer: Natalie Behring/Bloomberg
London: Bank of England (BoE) governor Andrew Bailey says it is “too early to declare victory” over inflation but the risks of persistent inflation appear to be receding, a sign he’s growing more confident about further interest rate cuts.
Bailey said the “second round inflation effects appear to be smaller than we expected” and that “we are now seeing a revision down in our assessment of that intrinsic persistence, but this is not something we can take for granted”, according to a text of a speech he delivered last Friday in Jackson Hole, Wyoming.
His comments appeared to suggest the BoE is growing increasingly comfortable with the inflation outlook.
The British central bank lowered its benchmark lending rate by a quarter point earlier this month to 5%, the first reduction since the start of the pandemic.
His words offered no guidance on whether BoE officials will move again in September, when the US Federal Reserve (Fed) is on track to join with loosening.
Investors expect another cut from the BoE in November to 4.75%, pricing the chances of a move next month at just one-in-five.
Instead, he reiterated the BoE’s guidance from November that some degree of restrictiveness in policy will have to remain until inflation is fully subdued.
Before the last cut, the BoE said rates are tight enough that they’d bear down on the economy even if they’re lowered.
The comments leave the impression that officials will move slowly in making reductions and keep an eye on how data is responding.
“We are not yet back to target on a sustained basis,” Bailey said. “Policy setting will need to remain restrictive for sufficiently long until the risks to inflation remaining sustainably around the 2% target in the medium term have dissipated further. The course will therefore be a steady one.”
The pound had risen 1% after Fed chair Jerome Powell said last Friday that “the time has come for policy to adjust”, all but confirming lower rates are on the way in the United States next month.
The pound held onto the gains following Bailey’s comments, trading at its highest in more than two years and lurching above US$1.32.
The European Central Bank eased borrowing costs in June and is expected to move again in September.
Having brought British inflation down from its peak of 11.1% in late 2022, the BoE expects it to rebound by the end of the year. Inflation dropped to the 2% target in May, where it remained in June.
It rose to 2.2% in July and the BoE sees it bouncing back to 2.8% by December due to higher energy bills. — Bloomberg
