Bank of England mulls early rate cuts amidst inflation decline

The Governor of the Bank of England, Andrew Bailey, hinted that the bank might lower interest rates even before inflation reaches its 2 per cent target. Speaking to the Treasury select committee, Bailey noted a rapid decline in UK inflation and expressed optimism about the economy, suggesting that the technical recession experienced last year was likely to be minor.

Bailey emphasized that waiting for inflation to reach the target before considering rate cuts was unnecessary. His remarks echoed similar sentiments expressed earlier by the BoE’s chief economist, Huw Pill. While the Monetary Policy Committee maintained the key rate at 5.25 per cent in its recent meeting, it hinted at potential rate cuts, marking a significant shift since the onset of the Covid pandemic.

Bailey refrained from specifying the timing or extent of potential rate cuts but acknowledged market expectations of such actions, indicating comfort with the prospect. He stressed the bank’s commitment to ensuring sustainable inflation returns to target levels, looking beyond temporary fluctuations.

Following Bailey’s comments, UK government bonds experienced a global rally, with traders in swaps markets adjusting expectations to include at least three rate cuts by year-end.

Despite recent data showing a technical recession in the UK at the end of last year, Bailey downplayed its significance, citing positive signs of economic recovery. The BoE remains focused on indicators such as services price growth, wages, and labor market health to gauge inflation trends.

While acknowledging that services inflation and wage growth remain higher than desired, BoE Deputy Governor Ben Broadbent expressed confidence that wage growth would taper off as consumer prices stabilized. He defended the BoE’s policies, noting that the UK’s inflationary challenges are being addressed more effectively compared to historical precedents.