Andrew Bailey has warned of a tough battle ahead to bring inflation back to its 2% target as he rammed home the message that there was no immediate prospect of the Bank of England cutting interest rates.
For the third time in a week, Threadneedle Street’s governor pushed back against speculation in the financial markets that official borrowing costs would soon be reduced from their level of 5.25%.
Bailey used an interview with Newcastle’s ChronicleLive to stress that October’s sharp drop in inflation from 6.7% to 4.6% was the result of the previous year’s surge in energy prices not being repeated rather than a marked easing of underlying price pressures.
“I’ve very much used this analogy of a game of two halves,” the governor said. “They’re not equal but a lot of what we’re seeing at the moment, including that inflation came down [over two percentage points], and that’s very good news, is the unwinding of these inflationary effects of these external shocks.”
Bailey said the fall in inflation did not mean prices were coming down, merely that they were now rising less quickly than a year earlier.
He added“We’re going to see some more of that unwind effect but we’re not going to see another month, I’m afraid, where it’s going down 2% because of that.”
At its last meeting earlier this month, six of the nine members of the Bank’s monetary policy committee voted to keep rates at 5.25%, while the other three opted for a quarter-point increase. Since then Bailey has used a speech in London and an appearance before the Commons Treasury committee to play down talk of rate cuts.
“I’m very conscious of the position of the less well-off but we do have to get it down to 2% and that’s why I have pushed back of late against assumptions that we’re talking about cutting interest rates or we will be cutting interest in anything like the foreseeable future because it’s too soon to have that discussion,” he told ChronicleLive.
“I recognise higher interest rates do have effects. They do have effects on mortgage costs, and they also have an effect on rental costs because they feed through. What I would say, to be honest, is that if we don’t get inflation down, it gets worse.”
Bailey said that by the end of the first quarter of 2024 inflation might be a little under 4% but getting it back to its 2% target thereafter would be the result of the Bank’s monetary policy.
“And policy is operating in what I call a restrictive way at the moment – it is restricting the economy. The second half … [down to 2%] … is hard work and obviously we don’t want to see any more damage.”