Andrew Bailey: Bank could be aggressive in cutting interest rates

Andrew Bailey said the Bank of England may become “a bit more aggressive” with its interest rate reductions if inflation continues decreasing. Analysts suggest the Bank might embark on successive rate cuts continuing through next year. The Bank of England governor’s comments pushed the pound to its lowest level against the dollar since over a month. The pound fell 1.22 percent to $1.3104, but traders likely fueled some of this slide by seeking out safer assets as the Middle East conflict intensified.

The euro fell by nearly 1 percent to €1.189. Prior to Bailey’s remarks, traders expected another quarter-point reduction in rates this year next month. Now, they expect a quarter point drop in December that will bring borrowing costs down to 4.5 percent by the end.

RBC Capital Markets analysts said the Bank would be able to cut rates every meeting between November and May of next year. The analysts said that “Following recent changes in the Bank’s — particularly the governor’s– rhetoric, we think there’s now scope for MPC (monetary policy committee) to deliver a faster pace of cuts.” The Bank closely monitors the services inflation rate, which is currently at 5.6%.

At their last meeting, the Bank’s monetary committee, which includes the governor, voted unanimously to keep base rate at 5%. In August, the panel reduced rates by 25 basis point. This was the first cut since March 2020. Bailey, 56 years old, responded strongly to Liz Truss’s accusations that he had been part of an economic cabal on the left that was plotting her downfall. Bailey, in a reference to Truss’s mini budget and the pension crisis, said: “I recall Liz Truss telling me at the time that it was a financial issue, it is the Bank of Englands’ job to resolve it.” We did. “We used our intervention tools to deal with it.”

Truss’s £45bn of unfunded, surprise tax cuts forced interest rates to rise sharply. This, in turn, pushed down bond prices. The pension funds sold their assets to raise quick capital for payment obligations. This led to a rise in interest rates, and prompted the Bank to launch a limited bond buying programme to calm the panic. Bailey commented that it was ironic that someone who criticizes regulators would then say the Bank of England is not regulating.

The governor said that Rachel Reeves is “right to focus” on capital investment to combat climate change and stagnant productivity growth. Reeves’ and Sir Keir starmer’s pessimistic framing since Labour won the July election has led to a sharp drop in business and consumer confidence. The budget for October 30 is expected to see the government increase taxes, but offset this with increased public investment.

People listen to central bankers. Andrew Bailey is aware of this, and uses his comments between interest rate meetings in order to influence investors’ expectations. In his most insightful interview since September’s central bank meeting, Bailey has struck a dovish note on borrowing costs.

The Bank has been a little more aggressive in recent months. Predicting the monetary committee, the nine member panel that sets rates about every six weeks, would become “more agresive” is a slight departure from its previous rhetoric. The Bank stated in its MPC statement of September that “in the absence material developments, it is appropriate to remove policy restraint gradually.”

The committee did note, however, that “there was a range of views” about how quickly the price pressures will ease. It was clear that the four members of the committee who voted in August to lower rates, and eight other members who supported the rate hold in September, were not convinced that inflation would remain above target over the long-term. The Bank’s aggressiveness will depend on the incoming data that confirms the MPC majority opinion that inflation is finally under control, stabilising at 2.2%, just a hair away from the target of 2 percent.

Megan Greene, Catherine Mann and the other hawks in this group, who have voted more often to keep rates at current levels, are unlikely share their opinion. The European Central Bank has been predicted to cut rates more often due to the sluggish growth in Europe. The US Federal Reserve cut its interest rate by a larger half-point last month, citing similar concerns.

The growth has been above expectations in this year, which along with high inflation of services convinced traders that the Bank will lag behind other banks when it comes to lowering interest rates. This has made the pound stronger.

Bailey and the MPC may also be concerned about growth, given the deteriorating confidence of businesses and households due to Labour’s pessimistic view of the economy, and the uncertainty surrounding what Rachel Reeves is going to announce in her first budget, which will take place later this month.