Andrew Bailey, governor of the Bank of England, stressed that it is still “far too early” to consider interest rate cuts despite the recent “welcome news” on inflation.
Delivering the Henry Plumb Memorial Lecture, Bailey reiterated the Bank’s dominant message in recent weeks, saying “it is far too early to be thinking about rate cuts”.
Bailey’s comments come the week after the largest monthly drop in inflation since the early 1990s. The data showed that inflation fell to 4.6 per cent in October, down from 6.7 per cent the month before, with the steep decline reflecting much lower energy prices.
But the sharp fall had done little to assuage concerns in the Bank of England. “While the inflation data for October released last week were welcome news, it is much too early to declare victory,” Bailey said.
“Inflation remains too high, and we need to make sure we get it all the way down to the two per cent target.”
He noted that services inflation, which the Bank has identified as a key proxy for domestically driven inflation, remains “much too high”.
Although Bailey highlighted inflation’s recent fall, he noted that there are external risks to inflation returning to target, including the impact of climate change on harvests.
“The tragic events in the Middle East have added upside risks to energy prices,” he added.
Following the speech, the pound was trading over 0.4 per cent higher against the dollar at $1.2506, maintaining gains from earlier in the day. This put sterling at its strongest position against the dollar since early September.
Over recent weeks, central bankers have been pushing against the market expectation that rate cuts will be underway by next summer.
Due to the tightness of the UK’s labour market, inflation is expected to remain above target until the end of 2025. Markets however think that central banks will be forced to offer support to economies stumbling under the weight of higher borrowing costs.