(Alliance News) - Bank of England Governor Andrew Bailey believes the central bank will be able to cut rates further, but policymakers will need to decide meeting-by-meeting "how far and how fast" bank rate can be trimmed.
Speaking following the BoE's decision to cut bank rate by 25 basis points to 4.50%, Bailey said the road ahead will have "bumps" but the disinflation process is on track.
But Bailey still sees a "gradual easing of underlying inflationary pressures".
The BoE governor also fielded questions on tepid economic growth, a glum forecast by the central bank, and the insertion of the word "careful" in its monetary policy to sit alongside "gradual".
The BoE's Monetary Policy Committee voted 7 to 2 for the expected quarter-point cut. All members of the MPC backed a cut in interest rates. Two members Swati Dhingra, and previous 'hawk' Catherine Mann, preferred a larger 50 basis points cut, which would have taken base rate to 4.25%.
The MPC judged there had been sufficient progress on disinflation in domestic prices and wages to support the rate cut and said a "gradual and careful approach to the further withdrawal of monetary policy restraint is appropriate."
In a statement, the BoE noted economic growth has been weaker than expected at the time of the November Monetary Policy Report, and indicators of business and consumer confidence have declined. GDP growth is expected to pick up from the middle of this year, it noted.
The BoE thinks GDP fell by 0.1% in the fourth quarter and will rise by 0.1% in the first quarter.
Consumer price inflation is now expected to pick-up quite sharply in the near term, to 3.7% in the third quarter, before easing again.
However, the central bank believes this is due to other factors and not underlying inflation pressure.
Bailey noted that service price inflation, a gauge closely tracked by the BoE as it paints a picture of domestic price pressure, is largely set to abate.
In its monetary policy report of economic projections, the BoE said: "Measures of underlying pressures in services price inflation have continued to ease but remain elevated. They are expected to continue to moderate, including as labour cost pressures fall back somewhat."
Service price inflation eased to 4.4% in December from 5.0% in November, though the BoE noted that was due to one of the more volatile aspects of that price basket, airfares.
"Services inflation is expected to rise to just above 5% in January and average around that rate over 2025 H1. That rise is driven in part by volatile factors, including the expected reversal of the weaker-than-expected increase in airfares in December. In addition, the range of regulatory and fiscal measures outlined above – including increases in private school fees, bus fares, vehicle excise duty, sewerage bills and employer NICs – are expected to be adding just under 1 percentage point to headline services inflation in April 2025. Headline services inflation is then expected to fall back a little, to 4.7% in June," the BoE said.
"Bank staff judge that, looking through the impacts of regulatory and fiscal measures and other one-off factors, underlying services inflationary pressures will continue to ease slightly over 2025 H1. Measures of underlying services price inflation have been gradually easing, broadly as expected at the time of the November Report, though they remain elevated. Consistent with this, there has been an easing in underlying pay pressures since mid-2023, with these expected to abate further over 2025."
In its policy statement, the BoE said "a gradual and careful approach to the further withdrawal of monetary policy restraint is appropriate". The insertion of the world "careful" was in focus.
That word was added deliberately to reflect uncertainty, Governor Bailey said in the press conference. There are domestic and global uncertainties, Bailey said.
Among the uncertainties globally is US trade policy. Bailey said that any tariffs that contribute to fragmentation of the global economy will be a hit to growth.
But Bailey noted the BoE is not in a position to judge the effect from Donald Trump's administration's trade policy.
The US administration needs time to formalise its trade policy, Bailey added.
The BoE took large chunks out of its UK growth forecast. It predicts growth of just under 0.8% for this year, its outlook trimmed from 1% previously. The same pace of growth is predicted for 2025, the forecast slashed from 1.5%.
Bailey said measures announced in the UK budget are not to blame for the growth downgrade.
Last week, UK Chancellor Rachel Reeves announced plans to turn Oxford and Cambridge into "Europe's Silicon Valley" with a raft of housing and infrastructure development in the area.
And she said the government is backing a new third runway at Heathrow Airport, adding that she wants "proposals to be be brought forward by the summer".
She said the plans are part of her "fight" for economic growth across the UK.
Bailey, joined by Deputy Governors Clare Lombardelli and Dave Ramsden, were supportive of measures to boost growth. However, they noted any boost from the chancellor's announcement are more for the long-term, and not the central bank's forecast horizon.
The tepid growth, and prediction that inflation could spike to 3.7%, prompted one to ask Bailey if this can be characterised as "stagflation". Bailey said that word does not have a "particularly precise meaning", however.
Bailey also said bank rate is not on a "pre-set path". The conviction by the market that the BoE will cut more this year picked up following the decision.
That notion was perhaps strengthened by Mann, seen as a hawk, backing the 50 basis point cut. Bailey noted that Mann and Dhingra has different reasons for supporting a cut of that size.
"They had different views on inflation dynamics, the structural factors underpinning them, and future monetary policy," according to meeting minutes.
"For one member, a more activist approach at this meeting would give a clearer signal of financial conditions appropriate for the United Kingdom, even as monetary policy would need to remain restrictive for some time to anchor inflation expectations, and bank rate would likely stay high given structural persistence and macroeconomic volatility. For the other member, the subdued outlook for demand remained consistent with CPI inflation staying sustainably at the target in the medium term despite the expected near-term uptick in regulated prices, and bank rate needed to account for policy transmission and supply capacity over the medium term."
Ahead of the meeting, eyes were on gilts. The UK bond market endured a tumultuous time last month, with yields marching to the loftiest level since 2008.
But the BoE believes "global shocks" rather than UK ones, were largely to blame.
"Based on the 15-day averages to 28 January, US 10-year government bond yields were around 50 basis points higher since the November Report, while yields in the euro area had risen by around 30 basis points on average. In the UK, 10-year government bond yields had increased by around 55 basis points, although some of the move higher has since retraced. Market intelligence suggests that the repricing of gilts has been orderly, and bid-ask spreads have remained around historical averages," the BoE said in its monetary policy report.
Gold also came into focus at the press conference. Late last month, Reuters reported that the waiting time to load gold out of BoE vaults has increased.
Ramsden said there has been strong demand for slots for gold "but we can meet that demand". Gold stock held by the BoE since the end of last year is down 2%, the deputy governor said.
Ramsden added that there can be physical constraints to gold trade, its heaviness a reason he cited. Ramsden also used an example of his own path into the BoE in Threadneedle Street being tougher than usual on Thursday because of a lorry "in the bullion yard".
The pound traded at USD1.2396 shortly after the press conference concluded, down from USD1.2425 before the BoE decision.
By Eric Cunha, Alliance News news editor
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