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BoE's Bailey sees more optimism about inflation falling

Governor of Bank of England Andrew Bailey attends a Central Bank Symposium in Stockholm

LONDON (Reuters) -Bank of England Governor Andrew Bailey said there was now more optimism about the prospects for inflation falling this year, and noted that the central bank had not pushed back against market expectations for interest rates to peak at 4.5%.

Asked about the outlook for inflation by Wales's Western Mail newspaper, Bailey said: "There is more optimism now that we are sort of going to get through the next year with an easier path there."

Bailey said the central bank did not target a peak for interest rates, but noted that markets were now expecting BoE rates to rise no higher than around 4.5%, lower than before.

"I am not endorsing 4.5%, but what you may have noticed in December is that we did not include the comment that we made in November about the market being in our view rather out of line," he said in an interview on the Western Mail's Business Live website.

Before its November rate decision, markets expected BoE rates to peak as high as 6% - partly reflecting ongoing turmoil triggered by Liz Truss's brief stint as prime minister.

Financial markets now expect the BoE to raise its main interest rate to 4% from 3.5% on Feb. 2, with a roughly one in three chance of a smaller quarter-point rate rise.

British inflation hit a 41-year high of 11.1% in October, and dropped to 10.5% in December.

In November, the BoE forecast inflation would fall to 5.2% by late 2023, and the Western Mail said Bailey was sticking to that view. The BoE is due to publish new forecasts next month.

"What we think is the most likely outcome is that it (inflation) will fall quite rapidly this year, probably starting in the late spring and that has a lot to do with energy pricing," he said.

Bailey also said he continued to expect Britain would see a recession, albeit "a shallow one by historic standards".

(Reporting by David MillikenEditing by William Schomberg and William James)