Bank of England Governor Andrew Bailey said Britain’s inflation rate is likely to drop “markedly” this year, and the full impact of interest rate increases has yet to hit the economy.
(Bloomberg) — Bank of England Governor Andrew Bailey said Britain’s inflation rate is likely to drop “markedly” this year, and the full impact of interest rate increases has yet to hit the economy.
The remarks released in a text of his speech at the Mansion House in London this evening indicate policy makers are growing more cautious about further increases in borrowing costs that are now at their highest since the global financial crisis in 2008.
UK inflation has proved more persistent than other major economies, with the 8.7% headline rate more than four times the 2% target and the underlying “core” rate still rising in the latest official data.
The apparent stickiness of UK inflation has convinced markets that the BOE may have to raise rates as high 6.5%. So-called second round effects have seen higher energy and food prices seep into wages and drive up domestic inflation.
However, Bailey said he expects those underlying price pressures to fall automatically as headline inflation drops and as higher borrowing costs continue to filter through to the economy. The BOE has already raised rates almost 5 percentage points in the last 20 months and believes the full impact has still to be felt.
“Some of that tightening is still to come through the policy pipeline, and we expect underlying inflationary pressures to recede as headline inflation falls,” Bailey said in the text on Monday.
“Looking ahead, headline inflation is set to fall markedly over the remainder of the year. This largely owes to lower energy prices as last year’s substantial increases drop out of the annual calculation. Food prices should fall too as lower commodity prices feed through to prices in the shops.”
Britain’s economy “has shown unexpected resilience” in the face of “substantial – in some cases unprecedented – external shocks,” he added. The BOE is among a number of forecasters to have scrapped its outlook for recession.
He emphasized that inflation and wages are still rising much more quickly than is compatible with the BOE’s 2% target. Investors have almost fully priced in a half-point hike in the BOE’s key rate to 5.5% next month.
“The interaction of above-target headline inflation with labor market tightness and demand pressure in the economy has made underlying developments in goods and services price inflation more sticky than previously expected,” he said. “Both price and wage increases at current rates are not consistent with the inflation target.”
(Updates with comment and charts from third paragraph.)
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