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Bank of England could cut interest rates before inflation hits 2%, Bailey says

interest rates Governor of the Bank of England, Andrew Bailey attends the biannual Financial Stability Report press conference, at the Bank of England, in London, Britain, December 6, 2023. REUTERS/Hannah McKay/Pool
Interest rates may be cut as Bank chief says inflation shows ‘encouraging signs’. (REUTERS / Reuters)

The governor of the Bank of England (BoE) has said that inflation does not need to reach the Bank’s 2% target before it starts cutting interest rates.

Andrew Bailey told MPs that policymakers were looking for progress on services prices, wage growth and the labour market before they felt they could begin reducing interest rate. However, Bailey said it’s “not unreasonable” for the markets to expect the Bank to cut interest rates this year.

He told the Treasury Select Committee: “But it’s the progress of those three things.

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

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“We’ll be looking for sustained progress on those things to reach that judgment about how long this period of restrictive policy needs to be.”

Interest rates currently stand at a 16-year high of 5.25% but markets widely predict Threadneedle Street to start cutting as early as May or June.

In a nod to Bailey, BoE deputy governor Ben Broadbent also told MPs that interest rate cuts during 2024 are possible, but the timing depends on the inflation outlook.

In an annual report to the Treasury Committee, Broadbent says the Bank’s forecasts don’t rule out an easing of policy in 2024, adding: “In my view that is the more likely direction in which Bank Rate is likely to move.

"But even if that proves to be the case, the timing of any adjustment can only depend on the actual evolution of the economic data.”

Bailey said that the UK’s recession is “very weak” when compared to recessions dating back to the 1970s.

He added that the 0.5% cumulative reduction in gross domestic product (GDP) in the third and fourth quarter was “the weakest by a long way”.

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Swati Dhingra, a fellow member of the Monetary Policy Committee, said that if the Bank keeps interest rates high “for longer”, that could weigh on some parts of the economy.

“Despite the disinflation at play, and despite the fact that there has been some real wage recovery, we’re still seeing consumption very weak and very different from some of the other advanced economies where there has been a bounce back from the pre-pandemic levels,” she said.

MPC member Megan Greene tells MPs that she changed her vote on interest rates — from a ‘hike’ to a ‘hold’ — this month, due to signs that inflationary persistence is easing.

But although the signs are encouraging, Greene wants to see this continue before she changes her vote to a cut.

Watch: Andrew Bailey says UK economy showing 'signs of an upturn'

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