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Andrew Bailey took pains on Thursday to underline his determination to raise interest rates further if necessary, after the Bank of England governor warned there was still a long way to go before policymakers could relax on inflation.
But if the bank’s dire predictions are correct, Bailey will face increasing political pressure to ease policy in 2024, given the economic strains facing households and businesses.
The BoE’s outlook for the British economy was bleak, even though the Bank did not predict an outright recession when its Monetary Policy Committee voted to keep interest rates at 5.25 percent. The bank said the economy would barely grow for the rest of the year before leveling off for all of 2024.
Unemployment would reach 4.7 percent by the end of next year, while household consumption remains flat and the availability of credit for businesses declines, the bank predicted.
“The MPC says the UK economy faces another year of stagnation – and while it is not predicting a recession, it is dangerously close to one,” said Thomas Pugh, economist at accountancy firm RSM UK.
The tough months ahead will coincide with the run-up to the next UK general election, expected in 2024 and due to take place no later than January 2025.
The BoE was blunt in admitting its own responsibility for the deteriorating outlook after raising rates 14 times in a row before the past two decisions to hold rates steady.
But Bailey made clear that the fight against the worst rise in inflation in decades is far from over. The BoE predicted that while inflation will fall in the short term, reaching the Bank’s 2 percent target will take until 2025 – later than previously forecast.
“I want to re-emphasize this message that we will have to maintain restrictive policies to get back on track. . . and we still have a distance to travel,” Bailey told reporters. “That is the core message.”
Paul Dales of Capital Economics said Bailey and his colleagues were sending a hawkish message because they don’t want markets to conclude that interest rates will fall soon, easing financial conditions. “They know the work on inflation is not done yet,” he added.
Bailey’s message echoed the US Federal Reserve, which also maintained interest rates this week after similar decisions by the European Central Bank and the Bank of Canada. Jay Powell, the Fed chairman, emphasized Wednesday that the most important question he and his colleagues are asking is “should we do more walking?”
But Bailey, unlike Powell, painted a portrait of a decidedly morbid economy. The Fed met against a backdrop of faster-than-expected economic growth, with strong consumer spending in the third quarter boosting GDP by 4.9 percent year-over-year. By contrast, the British economy was likely to post zero growth in the most recent quarter and would do little better in the final three months of the year, the BoE said.
The US central bank suggested that accelerating job growth was driven by a rising labor supply, giving the economy more room to grow without worsening inflation.
But the BoE has increased its estimate of the unemployment rate compatible with steady inflation, meaning more people will need to be unemployed to curb inflationary pressures.
This forecast was accompanied by a gloomier assessment of potential output, underscoring the BoE’s concerns about Britain’s ability to grow its economy without exacerbating price rises.
Ben Broadbent, deputy governor of the BoE, stressed that “we have a more pessimistic view of the supply side of the economy,” partly due to sluggish productivity and GDP growth, accompanied by “still persistent inflation.”
Still, investors remained skeptical of Bailey’s warnings that the MPC could rise further. The swap markets expect only a 25 percent probability of another rate hike in February next year.
Market debate is instead focusing on the likely timing of the first UK rate cut, given weaker activity in sectors such as services and manufacturing, alongside a loosening labor market.
“We think the MPC will cut bank rates next year faster than it is willing to admit,” said Samuel Tombs of Pantheon Macroeconomics.
source : www.ft.com