Bank of England's Bailey Concerned Inflation Fight Will Get Tougher

Above: File photo of Andrew Bailey. © Pound Sterling Live, Still Courtesy of Bloomberg.

The Bank of England's Governor Andrew Bailey warned that interest rates would not be cut "in the foreseeable future" as he expressed concern that inflation will prove sticky below 4.0%.

"I'm very conscious of the position of the less well-off but we do have to get [inflation] 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," said Bailey.

The Governor made the comments to the Chronicle, following a visit to businesses and a school on Tyneside.

"By the end of the first quarter next year, when a lot of that [inflation] unwind will have happened, we may be a bit under 4% but we’ll still have 2% to go, maybe," he said.

Bailey has been forceful in his recent communication that the market had gotten ahead of itself by building expectations for the number of rate cuts that would likely come from the Bank in 2024.

These building expectations weighed on the Pound and UK bond yields, which the Bank of England feared was undoing much of the hard work to bring inflation down.

The market had priced as many as 80 basis points of rate cuts into its expectations for 2024, with the first cut falling as soon as May.

But last week's strong data and Bailey's ongoing campaign against rate-cut bets appear to have pushed back on these expectations lately.

He said on Monday that the rest of inflation's fall below 4% has to be done by fiscal policy and monetary policy, given the easy wins of falling energy prices have now dropped out of the data.

"Policy is operating in what I call a restrictive way at the moment — it is restricting the economy. The second half, from there to 2%, is hard work," says Bailey.

But Bailey also expressed concern that the economy is not strengthening enough to create the required supply to further weigh on inflation.

"It does concern me that the supply side of the economy has slowed. It does concern me a lot. If you look at what I call the potential growth rates of the economy, there’s no doubt it’s lower than it has been in much of my working life," he says.