The Governor of the Bank of England publicly expressed doves: the market’s expectations of an intere

The Governor of the Bank of England recently said that the market was correct in expecting the Bank of England to cut interest rates more than once this year. He said that he is increasingly confident that inflation is moving towards the target.

Bailey told the Financial Times that rate cuts would "come into play" at future meetings of the Bank of England's Monetary Policy Committee, amid signs that tighter policy has calmed the risks of a wage-price spiral.

"If the second round of inflationary effects doesn't happen, that's a good thing because monetary policy has done its job," he said.

Bailey added, "We have an increasingly positive story to tell on that front. The global shock is receding and we are not seeing a lot of stickiness in inflation at the moment, so we will return to normal monetary policy."

Are market expectations for a rate cut from the Bank of England "reasonable"?

Major central banks, including the Federal Reserve and the European Central Bank, have put summer rate cuts on the table as officials grow increasingly optimistic they have beaten the worst burst of inflation in a generation.

The UK Monetary Policy Committee met this week and kept UK interest rates unchanged at 5.25%. Official data showed that UK inflation has slowed to 3.4%, the lowest level in more than two years.

In an interview at the Bank of England after the meeting, the governor was more optimistic about the British economy, stressing that the extent of the technical recession in the second half of last year was very small and pointing to signs that the British economy was improving. "That's obviously good news."

Bailey added that it was striking that Britain had managed to slow inflation effectively while achieving full employment, which he said did mean the Bank of England was walking a "narrow" path in setting policy.

Bailey's upbeat comments will be welcomed by Prime Minister Sunak, who is shaping his election strategy around hopes of an improving economy, including lowering inflation and interest rates ahead of polling day.

Sunak this week claimed that 2024 will be the year of the economic "bounce back" and urged Conservative MPs to stick to his economic plan. The market expects the UK to hold a general election this fall.

Although overall inflation has fallen sharply, the Bank of England is still paying close attention to wages and prices in the services sector, where price increases are still more than 6%.

Bailey confirmed that the MPC had different views on how reassuring the indicators were, stressing that the BoE's work on inflation was not yet done. "Some people are more comfortable with the evidence they're starting to see, while others feel more evidence is needed."

Asked if he was among the former, he said, "What we're seeing is encouraging to me."

Bailey declined to say when or how much the Bank of England would cut interest rates this year, noting that markets now view a first cut in June as more likely. He added, "It doesn't seem unreasonable to me that the market is expecting a rate cut from the Bank of England this year."

Asked whether all upcoming interest rate meetings were taking place in real time in terms of possible policy action, he confirmed, "All of our meetings are taking decisions in real time and we make new decisions every time. "

Is inflation risk no longer “nothing to be afraid of”?

The Bank of England has been criticized for failing to predict the surge in inflation that will begin after the COVID-19 epidemic ends. Natural gas shortages caused by the Russia-Ukraine conflict have had a huge impact on the UK. But Bailey said the experience did not make the central bank more cautious about cutting interest rates now.

"Waiting too long also affects central bank credibility, and I wouldn't say that we or I have become more cautious or less cautious. We have learned a lot," he said.

Bailey insisted he did not need to see inflation fall to the Bank of England's 2% target before cutting interest rates, but said the key was that "inflation is on the right track".

Likewise, Bailey argued that policymakers should not wait for annual growth rates in wages and service prices to halve from their current levels of more than 6%. "You need to have confidence that it's moving in that direction," he said.

While BoE officials worried last year that a spiral between high wages and prices could bring a "second round of inflationary effects" to the UK, Bailey confirmed he was increasingly less concerned about that risk. "One thing it tells us is that monetary policy has done its job."

He added, “I have more confidence that the mechanisms — overall inflation, expectations, price setting, wage setting — are behaving the way I expect them to.”

Asked about previous miscalculations of rising inflation, Bailey insisted that "everyone" had miscalculated the scale of the surge. He is awaiting the results of former Federal Reserve Chairman Ben Bernanke's review of the Bank of England's forecasts and communications.

Investors will also be closely watching whether Bernanke suggests the Bank of England introduce a dot plot similar to the Fed.

Bailey hinted that the idea was under consideration, but said he wasn't sure it was the right path. He warned that one risk was that individual policymakers in the UK would be forced to reveal their personal interest rate expectations.

Still, Bernanke's report provides the Bank of England with a "once-in-a-lifetime" opportunity to review its internal forecasting process.

Bailey also said that in a hierarchical institution, he wanted to ensure there was an environment where BoE staff were not afraid to challenge senior officials. He said it was important to have an environment where staff could tell the MPC: "You are wrong".

Article forwarded from: Golden Ten Data

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