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The Bank of England may begin cutting rates before inflation falls to its 2 per cent target, its governor said, as he pointed to “encouraging signs” that price pressures are easing.
Speaking to the Treasury select committee on Tuesday, Andrew Bailey said inflation had “come down very rapidly” in the UK, adding that the technical recession the economy entered last year is likely to be “very small”.
“We don’t need obviously inflation to come back to target before we cut interest rates,” Bailey said. “I must be very clear on that, that’s not necessary.”
The comments, which echoed similar remarks by the BoE’s chief economist Huw Pill earlier this month, come after the bank’s Monetary Policy Committee held its key rate at 5.25 per cent at its most recent meeting.
However the central bank signalled then that it was ready to consider lowering rates for the first time since the pandemic.
On Tuesday, Bailey declined to comment on when exactly the first rate cuts could come, or how deep they would be. But he said market expectations that the BoE is going to cut rates during this year were not “unreasonable”.
UK government bonds led a global rally following Bailey’s comments. Interest rate sensitive 2-year gilt yields fell 0.07 percentage points to 4.55 per cent while benchmark 10-year yields fell 0.06 percentage points to 4.05 per cent.
Traders in swaps markets moved to price at least three cuts by the end of the year, up from two or three cuts ahead of the hearing.
Earlier this month, new data from the Office for National Statistics showed that the UK slipped into a technical recession at the end of last year. Gross domestic product fell 0.3 per cent in the final three months of 2023, following a 0.1 per cent decline in the third quarter.
Bailey played down the significance of the figures on Tuesday, saying the UK economy is showing “distinct” signs of an upturn.
The BoE is focused on services price growth, wages and the health of the labour market as it looks for signs that inflation is on course to hit its 2 per cent target.
Bailey said he was looking for “more sustained progress on those three things”, but he struck an optimistic note about recent developments. “We have seen, I think, encouraging signs on them,” he said.
