Andrew Bailey of the Bank of England: Inflation risk is decreasing

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Bank of England Governor Andrew Bailey said he was “cautiously optimistic” about inflation, but after a prolonged period of high price increases it was “too early to declare victory”.

Bailey's cautious comments, in a speech prepared for the Jackson Hole central bankers' summit, contrasted with the more forceful language of Federal Reserve Chairman Jay Powell, who said on Friday that “the time has come” for interest rate cuts in the United States.

The BoE cut interest rates for the first time in four years this month, raising its benchmark rate to 5 percent from 5.25 percent, after consumer price inflation fell from a 41-year high of 11.1 percent in October 2022 to the BoE's target of 2 percent in May and June. Inflation rose less than expected to 2.2 percent in July, according to official statistics released last week.

Financial markets expect the BoE to leave interest rates unchanged in September, but a further cut is priced in for November.

“Recent experience leads me to be cautiously optimistic that inflation expectations are better anchored because of the regimes in place,” Bailey will say in his speech later on Friday. “The inflation effects of the second round appear to be smaller than expected. But it is too early to declare victory.”

Bailey believed “provisionally” that “the economic costs of reducing persistent inflation – the costs in terms of lower output and higher unemployment – may be lower than in the past.”

He expects a phase of steadily declining inflation, “more like a soft landing than a process caused by a recession.”

Bailey said the extent of the intrinsic persistence of inflation, which has led to faster increases in prices and wages in response to external shocks, is “more difficult to assess,” but noted: “We are now seeing a downward revision in our assessment of that intrinsic persistence, but that is not something we can take for granted.”