Andrew Bailey: Interest rates are not likely to drop rapidly.

The Bank of England governor has stated that interest rates will continue to fall slowly, even as inflation is brought under control. They are unlikely to return near zero rates of previous decades.

Andrew Bailey was “very encouraged by the falling inflation. It has fallen from a high of 11,1 per cent in October of 2022 to 2,2 per cent. This is within a whisker’s distance of the Bank’s target of 2 per cent.

The governor told a local paper, the Kent Messenger, that although he voted to hold borrowing rates at 5 percent during the Monetary Policy Committee meeting earlier in the month, he didn’t expect them to return to ultra-low rates of the 2010s, following the financial crisis.

He asked: “Will interest rates return to the low, near-zero levels that we enjoyed until not so long ago?” I wouldn’t expect it because, among other factors, the two big economic shocks were what pushed interest rates in that direction. The financial crisis was the first big shock, then Covid. You’d need a very large shock to get back to these levels. You don’t want to experience any very large shocks.

“That’s a way to say my best guess is that it will settle at a neutral interest rate. Exactly what this will be depends upon a number of factors, but I expect rates will come down.” The UK economy continues to be affected by the Covid-19 pandemic. This is most evident in the labour force, where workers have been forced out due to long-term illnesses.

While energy bills are down from recent peaks they remain higher than before Russia invaded Ukraine on a full scale in February 2022. The two shocks pushed inflation to its highest level in four decades, and forced the Bank to raise borrowing costs from 0.1% to 5.25 percent.

Bailey, 65, stated: “Inflation is down considerably”. He added that we still need to bring it back up to target, and “we have a very unbalanced mixture of inflation components at the moment”.

The Bank’s monetary committee closely examines the domestic price dynamics, and the measure of services inflation is a key indicator. In August, it rose to 5.6% from the previous month.

The financial markets are expecting just one rate cut this year in November and borrowing costs to drop to around 3.5 percent next year. Goldman Sachs is a US investment firm that predicts the pound’s rapid strengthening against the US Dollar over the next 12 months, as Threadneedle street lowers interest rates slower than the US Federal Reserve.

Pantheon Macroeconomics analysts, a consultancy firm, stated: “Strong confidence in the economy and rising prices of goods will be dominant, causing rate-setters to remain cautious.” We expect 25 basis points in bank rates to be cut between November and February.”

Slowing down the interest rate decline could increase pressure on consumer confidence. This has been weakened in recent months due to uncertainty over tax increases and spending cuts that will be announced at Rachel Reeves’ first budget on 30 October.

Reeves, , the chancellor of , said at the Labour Party Conference , that she would not supervise a return to austerity. Reeves said that the unprotected departments of government, such as local councils, will face £20 billion in real terms spending reductions.

Bailey stated that Brexit would cause a short-term decline in UK trade, but over the longer term “trade will be redirected”. In his interview, he also claimed that he had “never met Liz Truss”, Britain’s shortest-serving prime minister.

Truss – who shocked the financial markets two years ago with her disastrous mini budget – said that she was considering removing Bailey’s position in April on grounds that he is part of a cabal which wants to end Truss’ premiership.

Bailey: “It’s part of public life to have to accept that there will be many comments.”