BoE's Bailey says "number of paths" for UK interest rates

(Alliance News) - The Bank of England offered little about the path for UK interest rates, but believes its monetary policy is now in restrictive territory, and will remain there for "sufficiently long" enough.

In a press conference following the interest rate decision, Governor Andrew Bailey did not get drawn into a rate cut, and commented that the central bank will be "evidence" driven in its decisions, akin to the European Central Bank's data-driven approach.

The move took the benchmark bank rate to 5.25% from 5.00% previously, with a majority of Monetary Policy Committee members voting for the hike.

Two members - Jonathan Haskel and Catherine Mann - preferred a 50 basis point hike and one member - Swati Dhingra - preferred to maintain the bank rate at 5.00%. Bailey said there was no case for a 50 basis point hike, however.

The pound struggled in the wake of the decision, with markets divided on how much more, if at all, the central bank will hike. Sterling bought USD1.2660 shortly after the press conference, but had dropped as low as USD1.2623 in the wake of the decision. It bought USD1.2659 beforehand.

"Given the significant increase in bank rate since the start of this tightening cycle, the stance of monetary policy is restrictive. The evidence is now clear that it is having an impact," Bailey told reporters.

Threadneedle Street has dug deep with 515 basis points worth of hikes in the current cycle. Where rates go from here was something Bailey was tight-lipped about, instead, he said "there are a number of paths".

When asked about the soonest he believes rates can be cut, he said will not "make a prediction about that".

"It's far too soon to speculate on when we might see a cut," Bailey said, before joking that the question falls into the "nice try category".

The BoE slightly lifted its inflation outlook. Though it still expects a year-end inflation rate of 5.0%, its outlook for 2024 has been raised to 2.5% from 2.3% and for 2025 to 1.5% from 1%.

"CPI inflation remains well above the 2% target. It is expected to fall significantly further, to around 5% by the end of the year, accounted for by lower energy, and to a lesser degree, food and core goods price inflation. Services price inflation, however, is projected to remain elevated at close to its current rate in the near term," the Bank of England said.

"In the MPC's August most likely, or modal, projection conditioned on market interest rates, CPI inflation returns to the 2% target by [the second quarter of] 2025."

Food inflation, which has been a major driver of price pressure in recent months, is expected to fade.

Bailey told reporters in a press conference: "Similarly, core goods price inflation continues to be broad-based. It is taking time for the fall in energy prices to work through the supply chain, and the prices of imported goods have continued to rise despite a fall in world export prices. That is why, in our central projection, we expect core goods price inflation to come down only gradually. But let me be clear, we do expect goods price inflation to ease over the rest of the year, and there are indicators that suggest it could happen faster than in our projection."

However, service price inflation is expected "to remain high".

"The upside surprise was primarily driven by some of the more volatile subcomponents of services price inflation, such as airfares and package holidays – and also vehicle excise duty, which is unrelated to the balance of demand and supply in the economy. We should not read too much into this surprise for this reason," Bailey said.

"Nevertheless, since other sub-components of services price inflation are closely linked to underlying cost pressures in the UK economy, continued strength in services price inflation may suggest that high inflation could persist for longer."

The BoE largely lowered its growth outlook, meanwhile. It expects the UK economy to grow 0.5% this year, upwardly revised from its May prediction of 0.3% growth. However, growth for 2024 has been lowered to 0.5% from 0.8% and the expansion for 2025 eased to 0.3% from a previously expected 0.8%.

Bailey warned of an "increasing degree of economic slack" will emerge in the UK in the middle of next year.

"Economic activity has shown some unexpected resilience over recent quarters. But the increases in bank rate we have implemented weigh to an increasing degree on UK economic activity," Bailey said.

The BoE said the labour market remains tight, though there are signs it is "loosening".

The central bank's projections were in focus, not only due to the monetary policy report being published, but also in light of it announcing a review into how it forecasts.

Ben Bernanke is to lead the probe. Bernanke, who was chair of the Federal Reserve for eight years until 2014, will be supported by the bank's Independent Evaluation Office.

The bank's review comes amid criticism for failing to predict the scale and duration of inflation over the past two years.

Bailey defended the bank's record on Thursday, noting that the UK has faced a number of economic shocks, including Russia's invasion of Ukraine.

By Eric Cunha, Alliance News news editor

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