Inflation remains a threat that is being “underestimated” by markets warns the Bank of England, suggesting that it is sensible to keep interest rates where they are.
Financial markets are putting “too much weight” on the latest UK inflation figures and should be concerned about the risk of inflation persistence, the Bank of England’s governor has warned.
Andrew Bailey said the sharp drop in UK inflation in October was “good news” but that market expectations of how fast inflation will fall are too optimistic.
“We are concerned about the potential persistence of inflation as we go through the remainder of the journey down to 2%,” he told the Treasury committee. “And I think the market is underestimating that.”
Markets have been pricing interest rate cuts as early as May next year, but the Bank of England has cooled down those expectations.
Bailey said that while the peak seemed to have been reached, rates were likely to remain high for an “extended period”. Bailey on Monday said it was "far too early to be thinking about rate cuts".
BoE deputy governor Dave Ramsden said at the same hearing: "We are ... being very clear in distancing ourselves from market expectations.”
Ramsden said he “would not rule out” further rate hikes and “a restrictive policy stance is likely to be warranted for an extended period of time.
MPC member Catherine Mann, who has consistently voted for heavy interest rate increases, told MPs that “more tightness is important to cement our commitment to the 2% target”.
Threadneedle Street kept rates on hold for the second meeting in a row this month after 14 consecutive increases to fight an inflation rate that peaked above 11% in October 2022.
Bailey also said the UK will not have another fall in inflation like the last one.
“We’re not going to get another one like last week though; that’s the last of those base effects to come through,” he told MPs.
Inflation slowed to 4.6% last month from 6.7% in September, according to official figures.
The BoE expects inflation to return to 2% only at the end of 2025.
Bailey also told MPs that policymakers are “not seeing a collapse” in the demand or supply of credit despite the uncertain economic backdrop.
He said: “For both corporate and household sectors, at the moment, we are seeing some signs of small pick-ups in arrears and some weakening in demand for credit, but from a low level.
“We are not seeing a collapse in either demand for credit or the ability of the financial system to supply credit.
“We keep quantitative tightening under constant review but so far I have not observed an effect that is happening which is giving me cause for alarm in terms of an impact on broader credit conditions or the broader health of the corporate sector or household sector.”
Watch: ‘Much too early’ to cut borrowing costs, Bank says after holding rates at 5.25%