Andrew Bailey has signalled financial markets are wrong to assume the Bank of England will raise interest rates further, in a bid to convince investors that Britain’s economic outlook differs from the US and eurozone.
The BoE governor said on Wednesday that the bank no longer presumed it would increase rates beyond the current 4 per cent — even though market expectations of rate rises have risen markedly over the past month in tandem with changes in other advanced economies.
Markets anticipate UK rates will hit 4.75 per cent by the end of the year, up from an expectation of a peak of 4.25 per cent at the start of February.
Bailey said he had not seen any data to justify such a change of outlook, adding that, as of its meeting last month, the BoE had shifted from its previous stance “that further increases in [the benchmark] bank rate would be required”.
He added: “At this stage, I would caution against suggesting either that we are done with increasing bank rate, or that we will inevitably need to do more.”
The pound gave up earlier gains and UK government bond yields slid after Bailey spoke, but the moves proved shortlived. By Wednesday afternoon, the yield on 10-year gilts was 3.84 per cent, up from 3.32 per cent a month ago.
Market expectations of further UK interest rate rises have moved closely in line with US and European inflation data, which have been worse than expected over the past month.
While those numbers have sparked expectations that the US Federal Reserve and European Central Bank will need to raise rates further than previously thought, UK inflation figures have not outstripped forecasts.
By contrast with the recent indicators for the US and Eurozone, Bailey said that the UK “economy is evolving much as we expected it to”. He noted that inflation had been only “slightly weaker” and wages and economic activity “slightly stronger” than anticipated.
Speaking on a day when British house prices registered their largest decline in more than a decade, he said the BoE had to “monitor carefully” how the sharp increase in rates of the past 15 months was “working its way through the economy to the prices faced by consumers”.
Property prices fell 1.1 per cent in February compared with the same month last year, the biggest drop since November 2012, mortgage provider Nationwide said on Wednesday.
The growing rate rise expectations have also been unwelcome news for chancellor Jeremy Hunt as he prepares for his first Budget on March 15.
Market expectations of rates have a direct impact on five-year forecasts for the cost of servicing government debt from the Office for Budget Responsibility, the fiscal watchdog.
The BoE still expects inflation to fall rapidly this year, particularly in April when energy bills are forecast to rise by much less than at the same period last year.
Bailey said the smaller rises would not relieve households’ difficulties with the cost of living because prices themselves had not come down.
He added that if inflation appeared to be more persistent, the BoE would need to lift rates further.
“If we do too little with interest rates now, we will only have to do more later on. The experience of the 1970s taught us that important lesson,” he said.