BOE Latest: Bailey Says UK Rates Likely Near Top of The Cycle

Bank of England Governor Andrew Bailey suggested UK interest rates may not have to rise any further, saying a “marked” drop in inflation is likely this year and that monetary policy is probably “near the top of the cycle.”

(Bloomberg) — Bank of England Governor Andrew Bailey suggested UK interest rates may not have to rise any further, saying a “marked” drop in inflation is likely this year and that monetary policy is probably “near the top of the cycle.”

“Many of the indicators are now moving as we would expect them to move,” Bailey said at the hearing in Parliament on Wednesday. “Indicators are signaling the fall in inflation will continue.”

Later in the hearing, he said: “We are much nearer the top of the cycle on interest rates.”

The pound fell to a three month low. It dropped as much as 0.7% to trade below $1.25 for the first time since June after Bailey’s comments and also strong US economic data. Gilts rallied even as US and German equivalents fell, with the yield on two-year UK bonds down five basis points to 5.23%.

Bailey was speaking to the Treasury Committee of lawmakers along with Deputy Governor Jon Cunliffe and Swati Dhingra, who both serve on the nine-member Monetary Policy Committee, and Elisabeth Stheeman from the panel overseeing financial policy.


Highlights From Testimony:

  • Bailey says UK rates may be ‘near the top’ of cycle
  • Cunliffe says mixed data on economy suggest ‘turning point’
  • Dhingra says promising signs UK inflation is coming down
  • Terms of reference on Bernanke review due after Sept. 22

Bailey Says GDP Upgrades Point to Resilience of Economy (4:17 p.m.)

Bailey said the huge upgrades to UK GDP made by statisticians last week explain the economy’s resilience that helped to fuel high inflation.

The Office for National Statistics found that economic output reached pre-pandemic levels much earlier than it first thought after heavily revising its figures for 2021. Strong demand has helped to keep inflation at high levels for a prolonged period.

“We’ve been telling a story about the fact that we think the economy has been more resilient than we expected to be and of course, the revision helps with that story,” Bailey said.

Cunliffe said he wish he had known about the economy’s strength at the time but said he has “huge sympathy” with statisticians calculating output during the pandemic.

Bailey Says BOE Has Choice on Returning CPI to Target (4:05 p.m.)

The Bank of England can take longer to bring inflation back to target to avoid triggering a recession, Bailey and other ratesetters reminded members of Parliament.

Bailey said a recession was not the plan, but “we can’t always say we will avoid it.” He was asked whether the BOE would have to cause a recession to bring inflation back to the 2% target.

Dhingra said: “A recession poses a risk to our inflation mandate so that is something we would not like to happen at all.” Dhingra and Cunliffe said the mandate allows ratesetters to take longer to bring inflation down when there is a recession trade-off. They can extend the period from two the three years.

Cunliffe added that a recession would potentially lead to an inflation undershoot and that the BOE’s “remit gives us the flexibility to extend that period.”

Bailey Urges Banks to Pass on Higher Rates to Savers (3:52 p.m.)

Bailey said banks were now largely passing on higher rates to their savings customers. He signalled that the BOE was not focused on boosting banks’ profitability in order to bolster their financial stability.

The BOE sets stress tests for lenders which require a certain level of capital in order to pass. “We’re not seeking to see capital levels higher than that,” Bailey said.

Bailey Says Banks Shouldn’t Close Accounts Due to Politics (3:32 p.m.)

Bailey waded into the debate over a UK bank withdrawing an account for Nigel Farage, a pro-Brexit politician. “It is unacceptable to close bank accounts on the basis of people’s politics,” the governor said. 

The issue became front page news after Coutts removed the former UKIP leader as a customer, citing his political views and connections as a reason for doing so. The heads of Britain’s biggest banks later committed to the principle of “non-discrimination based on lawful freedom of expression.”

The dispute prompted Alison Rose to step down as chief executive officer of NatWest Group Plc, which owns Coutts, after it emerged that she discussed Farage’s account with a journalist. Bailey reiterated that the Financial Conduct Authority was looking into the issue.

Cunliffe Says UK Credit Conditions Are Tightening (3:12 p.m.)

Cunliffe said lenders are tightening credit conditions and company indebtedness is climbing after the surge in interest rates.

“We’re seeing a rise in more indebted companies, which again is what you would expect to see when interest rates go up because debt service is going up, but nowhere near to the levels that we’ve seen in past peaks,” he said.

“We’re seeing some tightening of credit conditions. … I don’t think we’re seeing anything like a credit crunch at the moment.”

Bailey Says Much Impact of Rate Rises Yet to Hit UK (3:09 p.m.)

Bailey warned there is still a “substantial amount” of policy tightening yet to fully feed through to the economy amid concerns over the central bank over-tightening.

“We’ve definitely got a substantial amount of transmission to come,” he said. “It appears that there is a longer transmission, that the lags are longer. We have to factor that in our policy decision.”

Cunliffe Sees ‘Mixed Signals’ Coming From UK Economy (2:49 p.m.)

Cunliffe said the latest economic indicators are providing “mixed signals” about the UK, with pay growth strong but some cooling in the labor market.

“The first thing I’d say is the evidence is mixed. And we are getting mixed signals about the economy now, which is what you expect when you come into periods where you might be close to turning points.”

Bailey Says Next UK Inflation Figures May Show Tick Higher (2:43 p.m.)

Britain’s headline inflation rate may tick higher when figures for August are released on Sept. 20, Bailey said, noting that a small increase wouldn’t change his overall outlook for a marked decline.

“I think inflation is coming down and our sort of short term forecast is performing better,” he said. “I think it is, I should say possible that we will get a tick up in the next release because fuel prices went down in August last year and went up a bit in August this year.”

Bailey Says Money Supply a Bad Inflation Predictor (2:32 p.m.)

Bailey said money supply indicators are a poor indicator of where inflation is heading, hitting back at critics who say the BOE didn’t pay enough attention to the figures when prices were starting to rise.

“I would say as a short-run predictor, money is not as good in that sense,” Bailey said.

Monetarists have argued that that the surge in money supply during the pandemic helped to fuel inflation. They now warn that the money supply signals that the UK is in danger of recession and deflation. Recent data revealed that the broad money supply stopped growing for the first time in 13 years in July.

Bailey Sees Inflation Coming Down in UK (2:26 p.m.)

Bank of England Governor Andrew Bailey said he expects a “marked” fall in inflation by the end of this year after a recent cooling in price pressures.

Bailey said whether inflation expectations follow the recent moderation in price growth will be key to its upcoming policy decisions ahead of its next meeting on September 21.

“Many of the indicators are now moving as we would expect them to move and are signaling that the fall in inflation will continue,” he told Parliament’s Treasury Committee on Wednesday.

“As I’ve said a number of times, I think [the fall] will be quite marked by the end of this year.”

Bailey Says Bernanke Review Terms Due After Sept. 22 (2:19 p.m.)

Bailey said the court of the BOE, the governing board, will meet around Sept. 22 and is likely to finalize the terms of reference for a review into the central bank’s forecasting at that meeting. The review, led by former US Federal Reserve Chair Ben Bernanke, was ordered after criticism that the BOE was slow to act in inflation.

Dhingra Says UK Rates Are Already High Enough (2:15 p.m.)

UK interest rates are high enough and any further rises risk harming growth unnecessarily, according to Swati Dhingra, an external ratesetter at the Bank of England.

In her annual report to the Treasury select committee, Dhingra said: “Policy is already sufficiently restrictive, and the lagged effects of further tightening pose serious risks of output volatility in order to make a small dent on inflation.”

Dhingra is the most dovish member on the BOE’s nine-strong monetary policy committee, having repeatedly voted to hold rates at recent meetings.

Dhingra Says UK Inflation Pressures Are Easing (2:15 p.m)

In her report, she said domestic pressures on inflation were easing as the impact of 14 successive rate rises starts to be felt. Existing policy will be amplified as households roll off fixed-rate mortgages on to new, more expensive deals, she said.

Dhingra dismissed the stronger-than-expected wage numbers in the latest jobs data as “a lagging indicator and one of the last outcomes to be impacted in the transmission of monetary policy to the real economy.”

More relevant has been the rise in unemployment and the fact there has been little evidence of corporate profiteering. “There is not yet evidence to suggest firms will seek to increase their margins, particularly as output producer price inflation has been falling,” she wrote.

Future risks to inflation come from threats to supply chains and commodity prices that might be caused by “geopolitics or extreme weather.”


Read more:

  • BOE Chief Economist Favors ‘Table Mountain’ Path for Rates
  • BOE’s Broadbent Warns UK Rates Need to Remain High for Some Time
  • Bailey Says ‘Last Mile’ of UK’s Inflation Fight Will Take Time
  • BOE’s Dhingra Sees Promising Signs of Slower Inflation Ahead
  • NatWest CEO Rose Goes From UK Star to Outcast Over Farage
  • UK INSIGHT: BOE May Need Jobless Rate Above 5% to Cool Wages

–With assistance from Greg Ritchie, Eamon Akil Farhat and Katherine Griffiths.

(Updates with market reaction and details from the testimony.)

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