Bank of England's Bailey Has Some Words of Warning

Above: File image of Governor Andrew Bailey. Photo by Zara Farrar / HM Treasury.


According to its Governor Andrew Bailey, the Bank of England might have to raise interest rates further as he continues his crusade to push back against growing market expectations for rate cuts in 2024.

Bailey told the National Farmers Union overnight that it was too early to consider rate cuts, as some components of inflation remained far too high and as wage growth continues to rise sharply.

"The Bank of England Governor has some words of warning," says analyst You-Na Park-Heger, an analyst at Commerzbank. "He even went as far as saying that it might become necessary to hike interest rates further if there were signs of stubborn inflation."

Bailey has already in November made the point that interest rates must remain elevated for a protracted period, confirming his unease with market developments.

Money market pricing shows that up to 80 basis points are now 'priced in' for 2024, which implies a little over three 25bp cuts, with the first coming as soon as May.


Above: Money market pricing based on the GBP OIS shows a rapid deflating in interest rate expectations, signalling a first cut at the Bank of England occurring as early as May. Image courtesy of Goldman Sachs.


Rising expectations for rate cuts are reflected in lower UK bond yields, pushing down the cost of borrowing in the economy in a development that is at odds with the Bank's mission to bring down inflation.

Bailey said the Bank was "on watch for further signs of inflationary persistence that may require interest rates to rise again".

"It's too soon to be thinking about rate cuts with services inflation being much too high and wage growth still elevated. He also mentioned upward inflation risks ranging from global economic fragmentation," says Mathias Van der Jeugt, an analyst at KBC Bank.

Van der Jeugt said although Bailey's comments had no direct impact, it appears to have halted sterling’s decline. "EUR/GBP yesterday closed back below 0.8750 from a start at 0.8762."

When he testifies to the UK Parliament's Treasury Select Committee on Tuesday, Bailey will shed more light on the issue.