Inflation warning from the Bank of England

Bank of England (BoE) Governor Andrew Bailey answered the questions of BoE Deputy Governor Dave Ramsden, Monetary Policy Committee member Catherine Mann and members of the Treasury Committee in the British Parliament.

Reminding that the country’s Consumer Price Index (CPI) slowed down by 4.6 percent on an annual basis in October, more than market expectations, Bailey said that the decline in inflation was good news but an expected development.

Noting that they expect a further decline in inflation, including food prices, Bailey said, “Beyond this, larger declines in inflation will depend on secondary effects. Salary increases are still high, not compatible with our 2 percent target level in inflation.” he said.

Pointing out that upside risks continue despite the decline in inflation, Bailey said, “The first of these is that risks to domestic inflation dynamics remain high and wage increases are among them. Another risk may arise due to the impact of tension in the Middle East on oil prices. Geopolitics “Oil prices may increase due to tension. It has not happened yet, but in the event of a broader regional conflict, it may be reflected in prices. Markets underestimate the risks of persistent inflation.” said.

Bailey stated that, therefore, the view to keep the policy rate at the current level is logical.

Upon one of the members’ statements that the BoE was late in increasing the policy rate against inflation, Bailey responded by saying, “We were one of the first big banks to raise the policy rate, this is not true.”

Bailey also stated that the bank will reach its 2 percent inflation target and that this level is the “operational definition of price stability”, therefore he described the views in favor of increasing the inflation target to 3 percent as “bad arguments”.

Bailey evaluated that we are faced with a picture showing that demand in the country is gradually slowing down.

BoE Vice President Ramsden reiterated that the bank has concerns about persistent inflation and said, “We believe that inflation will drop to 3.8 percent by the end of the first quarter of 2024. This is good news, but we predict that service sector inflation will still remain at 6.4 percent. All “These are indicators of persistent inflation and the points we focus on when determining the policy rate,” he said.

Reminding the expectations in the markets that the BoE will reduce the interest rate, Ramsden said, “This is the opinion in the markets, but this does not mean that we approve of these views. We are commenting and we are very clear that we have isolated ourselves from market expectations.”

BoE Governor Andrew Bailey had previously said that it was too early to even consider reducing the policy rate.