BOE Governor signals UK’s inflation fight has further to run
BANK of England Governor Andrew Bailey hinted policymakers can’t let up yet in their fight against inflation, even as signs amassed that the UK economy is weakening.
Wages are growing too quickly to be compatible with the central bank’s 2 per cent inflation target, and declining pressure on food prices has “got quite a way to go yet,” Bailey said in an interview with the Belfast Telegraph published on Friday (Oct 20).
The remarks coincided with official figures showing an unexpectedly sharp drop in retail sales in September and a boom in tax receipts from soaring inflation. Together, the data indicated the searing pressures on prices that the BOE is trying to tackle.
“Persistently high inflation, an unseasonably warm September, and high borrowing costs all point to a depressed consumer with disappearing confidence in the direction the economy is going,” said Charles Hepworth, Investment Director at GAM Investments. “This now appears to be increasingly reflected in voter intent.”
UK two-year yields, which are among the most sensitive to changes in monetary policy, fell four basis points to 4.94 per cent, retreating from a one-month high reached on Thursday. Money markets pared wagers on further interest-rate hikes, placing the chance of a final quarter-point increase by early next year at around 60 per cent, compared with 90 per cent earlier this week.
Policy makers are weighing how much more they have to rein in inflation, which is running at more than triple the target. Bailey said he “wasn’t surprised” by Wednesday’s inflation reading that indicated consumer prices rising 6.7 per cent from a year ago in September, the same pace as in August.
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This will be welcomed by Prime Minister Rishi Sunak, who has vowed to halve inflation by the end of the year. Bailey said the Bank’s previous forecasts “suggest this could be achieved.”
Bailey didn’t discuss interest rates in the newspaper interview, but he and chief economist Huw Pill have signalled that the key lending rate may remain at 5.25 per cent for the foreseeable future until more tangible evidence emerges that inflationary pressures are receding.
He added that he expects inflation to “keep coming down,” despite wage growth which is still near historic highs. “Pay growth as measured is still well above anything that’s consistent with the target,” Bailey said.
The BOE expects a large drop in inflation for October when the next round of figures are published next month. That will reflect a big jump in energy prices a year ago dropping out of the comparison. Falls after that may be more incremental, he said. BLOOMBERG
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