BoE chief Bailey expects inflation pressure to ease, but not yet a victory

By William Schomberg and David Milliken

LONDON (Reuters) – Bank of England Governor Andrew Bailey said on Friday he believed inflationary pressures were easing in the longer term but that further interest rate cuts would not be rushed as it was too early to say with certainty that inflation had been overcome.

In a speech to be delivered on Friday at a central banking conference organized by the Federal Reserve in Jackson Hole, Bailey said the knock-on effects of the price jump in 2022 appeared to be less damaging than the BoE feared.

“The inflationary effects of the second round appear to be smaller than we expected. But it is too early to declare victory,” he said in an advance version of the text provided by the BoE.

Following a sharp decline in the UK inflation rate, the BoE cut its key interest rate to 5% on August 1, after holding it at a 16-year high of 5.25% for almost a year.

Bailey said at the time that the BoE would be “careful not to cut interest rates too quickly or too sharply.”

In his speech on Friday, Bailey expressed his hope that the economic problems that often accompany high interest rates to combat high inflation could be avoided in Britain this time.

“For now, it seems to me that the economic costs of reducing persistent inflation – costs in terms of lower output and higher unemployment – may be lower than in the past,” he said.

“This is consistent with a steady disinflation process that is more like a soft landing than a recession-induced process,” he continued.

However, he reiterated the BoE's recommendation that interest rates must “remain restrictive for a sufficiently long period” and that a “stable course” should therefore be pursued.

The UK economy has grown more this year than expected by the BoE and most other forecasters – a welcome legacy for Prime Minister Keir Starmer’s new government – ​​while the acceleration in wage growth has slowed.

Bailey said he was “cautiously optimistic” that inflation expectations were better anchored.

“We are now seeing a downward revision to our assessment of that intrinsic durability, but that is not something we can take for granted,” he said.

It remains to be seen whether inflationary pressures will ease to a level that is sustainably consistent with the BoE's inflation target of two percent, “and what is needed to achieve this,” Bailey said.

While UK inflation returned to its 2% target in May and June, it rose again in July and the BoE forecasts it will reach 2.75% by the end of the year and remain above target throughout next year.

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Investors estimated the probability that the BoE would cut interest rates by another quarter of a percentage point at its September meeting at about one in three.

Economists polled by Reuters expect a further cut in the key interest rate of a quarter of a percentage point this year and a decline in the key interest rate to 3.75 percent by the third quarter of 2025.

At the event in Jackson Hole, Federal Reserve Chairman Jerome Powell had already stated on Friday that it was time for the Federal Reserve to lower its borrowing costs.

(Reporting by William Schomberg and David Milliken; Editing by Susan Fenton)