Bank clashes with City over interest rates: Bailey says markets are wrong to expect cuts anytime soon

The Bank of England yesterday stepped up its battle against City expectations of an interest rate cut – warning that markets were ‘underestimating’ the persistence of inflation.

Bank governor Andrew Bailey told MPs that traders were placing ‘too much weight’ on recent figures showing that inflation has plunged to less than 5 per cent.

Markets expect that interest rates will start to be cut from their current level of 5.25 per cent from June next year and some experts even see them falling to 4 per cent by the end of 2024. 

But Bailey told MPs on the Treasury select committee: ‘I really think the market is putting too much weight on the current data releases and the fact that we’ve seen inflation come down quite rapidly.’

And deputy governor Dave Ramsden – appearing alongside Bailey yesterday – said: ‘We are being very clear in distancing ourselves from market expectations.’

Bank of England governor Andrew Bailey (pictured) told MPs that traders were placing ‘too much weight’ on recent figures showing that inflation has plunged to less than 5%

The comments underscore the growing gulf between the rhetoric coming out of Threadneedle Street and the market view on the path of interest rates.

Bailey’s intervention came after figures last week showed inflation fell to 4.6 per cent in October – prompting Chancellor Jeremy Hunt to declare that the economy had ‘turned a corner’.

The figures mean that Prime Minister Rishi Sunak has met a pledge for inflation to halve over the course of 2023, having started the year at more than 10 per cent.

But the Bank aims to bring inflation down to 2 per cent and Bailey and other members of the Bank’s rate-setting Monetary Policy Committee (MPC) have been at pains to stress that there is still a long way to go.

Bailey said: ‘We are concerned about the potential persistence of inflation as we go through the remainder of the journey down to 2 per cent, and I think the market is underestimating that.’ 

The comments echo those of other Bank rate-setters made last week.

One of them, Megan Greene, said that while it was ‘good news’ that inflation was falling sharply it would be a ‘tougher slog’ to bring it down to the Bank’s 2 per cent target than it had been to go from 10 per cent to 5 per cent.

And on Monday, Bailey said in a speech that it was ‘too soon to declare victory’ in the battle against inflation and interest rates might still need to go up. Interest rates have risen sharply to their current level from 0.1 per cent at the end of 2021.

But with inflation coming down and the economy slowing, the Bank has left rates on hold for the last couple of meetings.

Bailey told MPs: ‘My view is that I think it’s sensible, based on what we have seen to date, to keep rates where they are.’

Despite such language, economists and traders are betting that rates can only go down from here. 

Sam Lynton-Brown of BNP Paribas yesterday said of Bailey’s insistence that rates might have to go up again: ‘We’re not buying it. We think they’ll take policy rates to 4 per cent by the end of next year.’