The governor of the Bank of England stated that Britain is displaying indications of bouncing back from its minor recession and will experience an increase when interest rates begin to decrease in the latter part of this year.
Andrew Bailey denied allegations that the Bank of England’s hesitation to decrease interest rates despite decreasing inflation indicated a lack of foresight, and clarified that rate reductions were on the horizon.
Bailey stated that it is not necessary for inflation to reach its target before we decrease interest rates. This statement was made in response to pressure from Conservative members of the Treasury committee regarding the news that the UK has entered a recession in the second half of 2023.
The governor expressed that the economy is currently experiencing full employment, which is a positive development. He also noted that, in contrast to past recessions, the UK is facing a relatively small economic downturn and is displaying clear indications of improvement.
Last year, there were two consecutive quarters of negative economic growth, resulting in a total decrease of 0.5% in GDP. According to Bailey, this is the weakest recession since the 1970s, with previous recessions ranging from a 2.5% to 22% contraction over two quarters.
The current yearly increase in prices is 4%, however, Bailey anticipates it will temporarily return to its target of 2% in the upcoming months before climbing to 2.75% by the end of 2024.
The Bank’s most recent predictions for inflation rely on the anticipated trajectory of interest rates in the financial sector. These predictions assume that the first decrease in borrowing expenses will occur in either June or August of this year.
Goldman Sachs announced on Tuesday that it anticipates the initial interest rate reduction to occur in June. This prediction differs from their prior forecast of May.
Bailey stated that they are content with a profile of interest rates that includes reductions. However, they did not specify the amount or timing of the cuts.
John Baron, a member of the Conservative party, inquired about the delay in implementing rate cuts despite clear indications of economic distress.
The governor stated that the Bank’s concern was determining the appropriate length of time for interest rates to stay restrictive in order to effectively bring inflation back to the desired target. However, he acknowledged that this goal has not yet been achieved.
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The governor mentioned that there were positive indications that inflation in the services industry and earnings growth, which are important factors considered by the MPC when determining rates, were decreasing.
Ben Broadbent, a deputy governor of the Bank, agreed with Bailey that there is a high likelihood of interest rate reductions in the near future.
In his yearly report to the Treasury committee, Broadbent stated that the Bank’s projections do not eliminate the possibility of policy relaxation in 2024. He also mentioned, “In my opinion, that is the most probable direction for the movement of the Bank rate. However, the timing of any changes will ultimately depend on the real progress of economic data.”
Source: theguardian.com
