Bank of England warns pace of rate cuts ‘shrouded in uncertainty’
The pace of UK interest rate cuts is “shrouded in a lot more uncertainty” due to the “unpredictable” global economic situation, the governor of the Bank of England has said.
Andrew Bailey told MPs during a Treasury Committee session that while rates are on a “glide path” downwards the Bank had “genuine concerns” about escalating trade tensions.
The governor, who was being quizzed alongside fellow members of the Bank’s Monetary Policy Committee (MPC), said it was not clear-cut where UK interest rates will go next.
“I think the path remains downwards, but how far and how quickly is now shrouded in a lot more uncertainty, frankly,” he told MPs.
“We’ve added the word ‘unpredictable’ to ‘uncertain’ because of the sheer nature of what we’re dealing with.”
Rate setters are also grappling with persistently high wage growth which could make cooling inflation more difficult and delay further cuts.
Speaking to MPs, four Bank policymakers including Bailey said they believed interest rate cuts could be made because inflation was falling but warned that the Monetary Policy Committee (MPC) was working against “unpredictable” policymaking by governments.
Bailey also said a “gradual and careful” approach to rate-cutting remained his “guiding light” despite some criticism of the policy approach by Bank watchers and even chief economist Huw Pill.
“I actually don’t think we’ve seen particular surprises in inflation outcomes relative to what we were expecting,” Bailey said.
“The key question for me is we’ve got this view which is that we will see pay coming down this year. It was a central point in the survey that our agents did at the start of the year. And at the moment, I would say, I think that path is intact.”
“That’s going to be a crucial judgment going forward.”
MPC external members Swati Dhingra and Catherine Mann, who both dissented against the consensus to cut Bank Rate to 4.25 per cent by respectively voting for a 50 basis point cut and a hold in May, were also present at the Treasury Select Committee.
Mann said she wished to take a more “activist” approach with regard to interest rate cuts by making quick and large moves, having voted for a 50 basis point cut in February.
The American economist said she voted for interest rates to be held due to “volatility in the financial markets” caused by President Trump’s flip-flopping on trade policy.
“Because that volatility is so great and has been great, in order to make a clear statement about the stance of monetary policy appropriate for the UK, I think it’s important to make a bolder move, and then to hold for longer,” she said.
“Now, if you look at my voting record on the way up, as it went, when inflation was rising, I was voting for larger increments to be front loaded in order to keep inflation more at bay. That was not what the committee as a whole chose to do, but my votes on the way down, so to speak, as inflation has come down, are following the same strategy.”
Dhingra said data on supply chains suggested inflation would not be as persistent as widely believed.
The Bank’s next decision will come at the end of this month.
Interest rate cuts unaffected by trade deals
Markets are pricing in around two further interest rate cuts this year but the MPC’s hawkish view on the economy has eased expectations of the cost of borrowing being lowered more rapidly.
Bailey also praised a recent trade deal struck between the UK and European Union but said the effects may not kick in for some time.
“I genuinely hope that it is obviously a path on the trade side towards more things because I do strongly take the view that if we can rebuild trade with the EU, because they are our largest trading partner, that’s a good thing.”
“The effects of those agreements tend to take quite a while to come through,” Bailey said.
Defence of ring-fencing
In separate remarks, Bailey said the removal of bank ring-fencing would have a “negative effect on UK lending” due to funds being directed away from retail to investment or activities outside the UK.
The letter he sent to Treasury Committee chair Meg Hillier said ring-fencing has become an “essential part of the UK regulatory framework” after the 2008 financial crash and protected stability.
Chancellor Reeves has hinted that ring-fencing could be dropped while the bosses of some of the UK’s biggest banks have urged the government to revise rules separating retail and non-retail banks.