Bank of England Governor Andrew Bailey pushed back against the market bets on interest rates, saying that officials need to carry on fighting inflation for now.
"It's really too early to be talking about cutting rates," Bailey said Wednesday in response to questions at an event in Ireland. "The market of course will reach a view. It has to reach a view on the future path of interest rates, I understand that. But we're very clear we're not talking about that.
Traders on Tuesday moved to price in more reductions in the BOE's benchmark lending rate next year, anticipating bets on 75 basis points of cuts next year for the first time. That's up from just 30 basis points last month.
While inflation remains triple the BOE's target, Bailey and the BOE's Chief Economist have said it's likely to fall sharply when the latest figures are published next week and that it's apt to return to target within two years. That has spurred investors to focus on a sharp slowdown in the economy that may turn to a recession.
"What we're saying is policy is going to have to be restrictive for an extended period to see the second half out, which is where policy is going to have to do the work to bring inflation back to 2%," Bailey said.
Bailey said the first half of the fight against inflation had been about the unwinding of large shocks to the economy, with energy slipping from high and supply chain frictions easing. That would explain a large drop in inflation the governor expects for the month of October.
But the second half of the battle would be all about monetary policy, Bailey said, which "is restrictive." Repeating the words from the minutes of the BOE's Monetary Policy Committee meeting this month, Bailey said policy "will need to be restrictive for an extended period of time."
There were still risks that inflation may rise again, Bailey added. While the conflict in the Middle East had not yet led to a rise in oil prices, he noted that this was a risk. Even so, Bailey said he was "optimistic" that inflation would be down to its 2% target over a 2-year horizon.
Bailey's comments follow a decision by the BOE to hold rates steady earlier this month at 5.25% for the second consecutive meeting. On the topic of the neutral interest rate, or where rates would need to be to hold inflation steady at the target of 2%, Bailey said the considerations for the long-run and short-run were pointing in opposite directions.
In the long-term, an aging population suggested we are "going back to low rates," he said. This conflicts with arguments from some other economists, who argue an older population will push up rates.
In the short-term, however, rising geopolitical tensions and a tight labor market pointed the opposite way, Bailey said.
The UK's potential growth, or the rate of growth it can achieve without causing undesirable inflation, has also fallen, Bailey added.
"Throughout much of my career, the potential growth rate in the UK economy has typically been about 2.25%," he said. This was sometimes increased by government policy. "Today, we would put it at a bit over 1%," Bailey said, adding that this complicated the setting of monetary policy.
Source : Bloomberg
