Bank of England governor signals greater uncertainty over further rate cuts
Andrew Bailey tells MPs that quicker-than-expected inflation has increased doubt over the timing of additional easing, endorsing market bets that cuts this year are unlikely
Bank of England Governor Andrew Bailey told MPs this week that there is "considerably more doubt" about the timing of further interest rate cuts after inflation picked up more quickly than expected, a development that dimmed hopes among millions of borrowers for cheaper borrowing costs this year.
Bailey said he still expected rates to come down over time but that it was now harder to say when that would happen. He also told lawmakers that the Bank's message "has been understood" by markets, a remark that appeared to endorse traders who have pushed back expectations of additional easing until next year.
The Bank's Monetary Policy Committee cut its benchmark Bank Rate from 4.25% to 4.0% last month, its first reduction after an extended period of increases. Despite that cut, market pricing has shifted and is not reflecting a further quarter-point reduction until the spring, according to traders' expectations cited by the Bank.
Inflation unexpectedly rose to 3.8% in July, the largest increase in more than a year, a development that monetary policymakers and private forecasters say could slow the pace of any further easing. The British Chambers of Commerce on Thursday published a forecast that predicted no further Bank rate cuts this year and only two cuts in 2026, citing a pick-up in inflation and weak consumer willingness to spend.
"The spectre of inflation is set to loom over the economy for some time, with consumers reluctant to spend. That's likely to slow the path of interest rate cuts," said Vicky Pryce, chairman of the BCC's economic advisory council.
The shift in market expectations increases uncertainty for households and businesses carrying variable-rate mortgages and other forms of debt. Lenders had been preparing for a gradual easing in borrowing costs after last month's cut, but the prospect of delayed cuts means borrowing costs may remain higher for longer than many borrowers had hoped.
Bailey's comments follow conversations at the Bank among MPC members about the appropriate policy stance in the face of sticky price pressures and mixed indicators on growth and wages. The Bank has stressed it will act to ensure inflation returns sustainably to its 2% target, while also weighing the risks that tighter policy poses to economic activity.
Sterling and gilt markets reacted to the governor's remarks and recent inflation data, with traders adjusting the pricing of future rate moves. Analysts said the Bank faces a balancing act: cutting too soon risks rekindling inflation, while delaying cuts risks prolonging the burden of high borrowing costs on households and firms.
The Bank will publish its next set of projections and minutes from the MPC meeting in the coming weeks, when it will provide further detail on its outlook for inflation and growth and on the likely timing of any future policy changes.