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Bailey says BOE can cut rates before inflation returns to target

Tan KW
Publish date: Tue, 20 Feb 2024, 09:54 PM
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Bank of England (BOE) Governor Andrew Bailey said inflation does not need to fall to its 2% target before policymakers back an interest-rate cut.

Bailey told Parliament’s Treasury Committee on Tuesday that the market’s bets on rate reductions this year are “not unreasonable” as he played down the significance of the UK entering recession.

The comments suggest the central bank is beginning to turn its attention to unwinding its aggressive series of rate rises as inflation subsides. While inflation is expected to temporarily fall to target in the spring, policymakers are closely watching the jobs market and services inflation for signs of persistent price pressures easing before relaxing their grip.

“We don’t need obviously inflation to come back to target before we cut interest rates. I must be very clear on that, that’s not necessary,” Bailey said.

He said there had been “encouraging signs” on the key indicators being monitored by the BOE but stressed that policymakers are looking for “sustained progress”.

Markets shifted forward their bets on interest-rate cuts following the remarks. Investors currently predict that the first rate reduction will arrive in August and now expect three quarter-point cuts in 2024.

Bailey did not push back against the market curve during Tuesday’s hearing.

“They think we’re going to cut rates during the rest of this year,” Bailey said. “We do not endorse the market curve. We are not making a prediction of when or by how much but I think you can you can tell from that profile of the forecast - again comparing it with the constant rate forecast - that it’s not unreasonable for the market to think that.”

The governor also played down the significance of data last week showing the UK fell into a technical recession in the second half of last year.

He said the figures point to a “very weak recession” and highlighted “distinct signs of an upturn”.

 


  - Bloomberg

 

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