Bank of England Won't be Panicked into Delivering Faster Rate Cuts

Above: File image of Governor of the Bank of England, Andrew Bailey. Picture by Kirsty O'Connor / Treasury.

Bank of England reiterates "gradual and slow" approach to interest rate cuts.

Bank of England Governor Andrew Bailey says UK interest rates are likely to follow a "gradual and careful" downward trajectory, while cautioning that monetary policy must remain restrictive for now to ensure inflation returns sustainably to its 2% target.

Speaking at the British Chambers of Commerce Global Annual Conference, Bailey said although significant progress has been made on reducing inflation, risks of persistence in underlying price pressures remain, especially from elevated wage growth and services inflation.

"There remain two-sided risks to inflation," Bailey said. "Given the outlook, and continued disinflation, a gradual and careful approach to the further withdrawal of monetary policy restraint remains appropriate. Interest rates remain on a gradual downward path."

The comments are consistent with the Bank maintaining a quarterly tempo of reducing interest rates, not being shaken into quickening, or delaying cuts.

Above: Market-implied expectations for Bank Rate dropped notably in June as investors saw higher odds of an August cut. Image courtesy of Goldman Sachs.

This predictability should underpin the Pound through the summer months.

The Bank of England held interest rates steady at its June meeting, with Bailey indicating that the case for a rate cut was not yet strong enough, despite cooling labour market conditions and signs of easing wage growth.

Private sector pay growth dropped to 5.1% in the three months to April from 5.9% earlier in the year, and pay settlements are increasingly aligning with the inflation target.

In his speech, Bailey pointed to softening demand, subdued business investment, and elevated household savings as further indicators that tight monetary policy is working to tame inflation.

The speech follows an appearance before the House of Lords on Wednesday, where he said the UK labour market was "softening" and that slack was "opening up", which would typically be associated with an admission that more support was needed from the central bank via the lowering of interest rates.

Above: Inflation has turned higher again.

However, he also told the lawmakers that "my view is the path of rates is still downwards, but it is going to be very gradual and very careful."

Bailey says external risks, such as the recent upticks in energy and food prices, could complicate the inflation outlook.

Headline inflation rose to 3.4% in May, up from the Bank’s target, but Bailey stressed that this was primarily due to regulated and administrative prices rather than domestic cost pressures.

The market thinks Bailey's communications are consistent with the next policy meeting in August delivering another interest rate cut.

However, Bailey told his audience at the BCC conference that rate decisions are not on a "pre-set path," and will depend on incoming data.

"Monetary policy needs to continue to remain restrictive for sufficiently long," he said, "until the risks to inflation returning sustainably to the 2% target in the medium term have dissipated."