Andrew Bailey signaled that financial markets were wrong in their growing belief last month that the Bank of England will need to impose much more interest rate hikes to rein in inflation.
Speaking at a cost of living conference in London on Wednesday, the BoE governor said the central bank still had no presumption that it would raise interest rates further from the current 4% level.
While financial markets now expect rates to rise to 4.75% by the end of 2023, above expectations of a 4.25% peak in early February, Bailey said he saw nothing in the data to justify the change in rates. rates. panorama.
“My reading of the evidence since our February meeting – the data we’ve had for economic activity, the job market and inflation – is that the economy is doing as much as we’d hoped,” Bailey said.
“Inflation was slightly weaker and activity and wages slightly stronger, although I emphasize ‘slightly’ in both cases.”
Market interest rates on 10-year government bonds fell after Bailey’s speech, but have not returned to Tuesday’s close. Government borrowing costs over 10 years stood at 3.87%, up from 3.32% the previous month.
Samuel Tombs, chief UK economist at consultancy Pantheon Macroeconomics, said “markets need to price in a greater chance of no change in bank rates” after the governor’s speech.
Bailey’s caution about persistent inflationary pressures contrasts with financial markets across the world, which have evidence of more persistent core inflation in the US and Europe, along with less evidence of a likely UK economic contraction as a sign. that central banks will need to raise interest 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 wait for the bank’s main message on inflation to change.
“At this stage, I would caution against suggesting that we are done with the bank rate hike or that we will inevitably need to do more,” he said.
“Some further bank fee increase may be appropriate, but nothing is decided. The data received will contribute to the overall picture of the economy and the outlook for inflation, and this will inform our policy decisions.”
Rising market expectations of a rise in interest rates last month was also unwelcome news for Chancellor Jeremy Hunt as he prepares for his first budget on March 15.
Market expectations about rates directly feed into the five-year forecasts of the cost of servicing government debt from the Office of Budgetary Responsibility, the watchdog, which are no longer much lower than the rates used in November’s Autumn Statement.
The BoE still expects the inflation rate to fall rapidly this year, although the price level remains much higher, with the decline accelerating in April, when energy bills are expected to rise much less than last year.
Bailey said the smaller increases would not ease households’ cost of living difficulties because prices themselves have not fallen. As a result, she added, the BoE has had to “carefully monitor” how the sharp interest rate hike to 4% over the last 15 months is “making way in the economy towards the prices faced by consumers”.
“We need to calibrate monetary policy very carefully to bring inflation back to target sustainably,” Bailey said, although he added that if inflation looked more persistent, the BoE would need to raise rates further.
“If we do too little on interest rates now, we’ll just have to do more later. The experience of the 1970s taught us this important lesson.”