Bank of England's Bailey Hints at March Rate Cut, But Sounds Caution Over Services Inflation
- Written by: Gary Howes
Above: File image of Governor Andrew Bailey. Image copyright Pound Sterling Live, courtesy of Parliament.tv
The Bank of England can sneak in another cut in March, but vigilance is the watchword.
This is the takeaway from the appearance of the Bank of England Governor before Parliament's Treasury Select Committee.
Andrew Bailey is discussing with lawmakers the Bank's decision to hold Bank Rate at 3.75% earlier this month, while hinting at what might come next.
He told the Committee he will be going into the coming meetings "asking if a cut is justified".
Bailey says inflation is returning to target, and this means there is scope for further easing in monetary policy. Markets see a near 90% chance of a rate cut in March.
"In addition to political uncertainty, the markets are expecting another rate cut in March. We remain bearish GBP," says Sarah Ying, analyst at CIBC Capital Markets.
Above: The market has lowered the path for Bank Rate over the course of February.
Turning to the most recent set of inflation data, the Governor says goods price inflation proved lower than expected, and this is potentially owing to deflationary developments in China.
However, there's also a note of caution: Bailey said service price inflation has not eased as much as the Bank thought it would.
This bolsters the argument that although inflation will fall further, it will then trend at above-target levels through the forecast horizon, which would limit the extent of further rate reductions.
Nikesh Sawjani, Senior UK Economist at Lloyds Bank, says the problem for the Bank of England 'doves' is that core and services inflation both edged lower by just 0.1 percentage point, to 3.1% and 4.4% respectively in January.
This means they are actually tracking 0.2pp and 0.3pp above the Bank of England’s forecasts.
"While we still expect the headline rate of inflation to drop to around 2% in April, stickiness in underlying measures is likely to remain for some time still," says Sawjani.
