Interest rates may be cut as Bank chief says inflation shows ‘encouraging signs’

Bank of England Governor Andrew Bailey (Photo: Justin Tallis/WPA)

Inflation in the UK has shown “encouraging signs” which could allow the Bank of England to cut interest rates soon, the Bank’s Governor has said – but he warned that “we are not there yet”.

Andrew Bailey said the Bank would not necessarily wait until inflation has hit its two per cent target before it starts to slash rates from their current level of 5.25 per cent.

But he also insisted he would not be pushed into cutting rates more quickly in order to stimulate the economy after it was confirmed that Britain fell into recession last year.

Mr Bailey said that the rate of price growth was likely to dip below two per cent in the near future because of a fall in energy bills but suggested inflation would then rise again.

He told the Commons Treasury Committee that he was monitoring services inflation, wage increases and labour market shortages as the best indicator for when it will be safe to cut rates, saying: “We’ve seen, I think, encouraging signs on them. So, services inflation is still above six per cent, there are some signs of it coming down now.

“I think some signs that pay is now adjusting down towards the lower headline inflation, which is what I’d expect to see. The quantity side of the labour market remains tight, there’s no question about that. 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.”

Mr Bailey added: “We are beginning to see the signs that those are going in the right direction, but we need to see more evidence of that, and speaking for myself that’s what will shape my voting going forwards… We are not there yet.”

The announcement last week that the UK has entered a mild recession prompted fresh speculation that the Bank’s Monetary Policy Committee (MPC) could cut rates in the spring in order to boost economic growth.

But the Governor said: “If you look at recessions going back to the 70s, this is the weakest by a long way because the range, I think, for the numbers for those two quarters for all the previous recessions was something like 2.5 per cent to 22 per cent in terms of negative growth, so minus 0.5 per cent is a very weak recession.”

Megan Greene, an economist who sits on the MPC, also said she was not ready to back rate cuts, telling MPs: “The data has been encouraging since late last year, but I would need to see further evidence before I were willing to change my vote.”

Mr Bailey’s deputy Ben Broadbent said: “It’s data not dates, that’s what we’re looking at and other central banks are no different.”

But Swati Dhingra, another external member of the MPC, warned about the risk of a “hard landing” if the Bank proves too slow to cut rates, causing unnecessary economic damage which could last for years.