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The Bank of England governor warned on Monday it was too early to declare victory over inflation even after the weaker price growth reported this month, as he predicted UK monetary policy will have to stay restrictive for “quite some time yet”.
Andrew Bailey argued in a speech that the squeeze on household incomes from higher food and energy prices might still be influencing wage demands, which risks perpetuating inflationary pressures.
The Office for National Statistics last week reported a steeper than expected drop in the headline inflation rate, to 4.6 per cent in October, from 6.7 per cent in September.
“Inflation remains too high, and we need to make sure we get it all the way down to the [BoE’s] 2 per cent target,” Bailey said at an event organised by the National Farmers’ Union.
“This also means being on watch for further signs of inflation persistence that may require interest rates to rise again.”
With the BoE Monetary Policy Committee holding interest rates at 5.25 per cent at its November meeting, the central bank has been stressing it is too soon to talk about reductions in borrowing costs given signs of stubborn inflation in the UK economy — a message that others including the US Federal Reserve and the European Central Bank have also been repeating.
Nevertheless, many investors and economists are now debating how soon — and where — interest rates will start falling in 2024 as they concentrate on signs of weakening economic growth in developed countries.
In his speech, Bailey pushed back against any talk of easing monetary policy in the wake of those figures, saying: “Let me be very clear: it is far too early to be thinking about rate cuts.”
He added: “The MPC’s latest projections indicate that monetary policy is likely to need to be restrictive for quite some time yet.”
Bailey stressed that while there had been some slowing in services inflation — a key variable being watched by the BoE as it gauges domestic pricing pressures — it remained “much too high and well above rates of services price inflation seen before the [Covid] pandemic”.
And while the BoE expected food price inflation to retreat, there were risks ahead in the coming months and years given that “food inflation can be volatile in the best of days”, Bailey said.
Climate change was impacting weather patterns and increasing the risk of poor harvests, he added.
Global economic fragmentation could also trigger price spikes, while the conflict in the Middle East had added “upside risks to energy prices and through that to the cost of food production”, Bailey said.
