Bank of England Governor warns the markets that inflation will not fall rapidly

Andrew Bailey warned the markets not to underestimate the UK’s persistent inflation, and emphasized that he expects the Bank of England to keep interest rates at high levels for a long time.

The BoE Governor told MPs Tuesday that investors are “putting too much weight” on the recent data which showed a sharp drop in headline Inflation for October.

Swaps market prices indicate that the BoE is expected to make its first rate cut, from 5.25 percent to 5.25% in June of next year. They also expect 0.7 percentage point cuts in 2024.

Bailey, speaking to the Treasury Select Committee, said: “We’re concerned about inflation persisting as we continue the journey towards 2%.” “I think the market undervalues that.”

Investors bet on rate reductions next year, as they monitor signs of a weakening UK economy and a drop in the headline consumer price index. The index fell from 6.7% in September to 4.6% in October.

The BoE tried to minimize the importance of the recent decline in CPI, saying that it was more focused on wages and other measures of inflation underlying such as service prices which point to persistent inflationary pressures.

In its latest forecasts released in early May, the central bank held the interest rate steady and predicted that the annual growth of the consumer price index would fall below target at the end 2025.

Other large central banks also reject the market expectation that rates will fall soon. Christine Lagarde told the media this month that the European Central Bank president did not expect rate cuts in the “next couple of quarters”, even though the ECB had held rates at its last meeting.

Federal Reserve Chair Jay Powell warned against being “misled”, saying that the mission to bring inflation back to the 2 percent target set by the central bank had “a long way to go”.

Bailey testified to the committee that the BoE’s current policy should be enough to bring inflation to its 2% target in due course. He insisted, however, that wages and service prices were still too high and that the “upside risk” was that inflation would be higher than expected.

BoE warned previously about the inflation risks arising from the Israel/Gaza conflict. The bank has downgraded their latest forecasts of the UK’s ability to grow without a price increase, which Bailey says could lead to persistent inflation.

Sir Dave Ramsden (one of the BoE’s deputy governors) told the Treasury Committee that the bank “distancing itself” from market expectations. He cited indicators like elevated services inflation as reasons for the bank’s current key rate.

Huw Pill’s comments earlier in the month had heightened market expectations of interest rate cuts next year. Pill suggested that investor expectations of a cut in interest rates halfway through the year next year are not unreasonable.

Catherine Mann, a hawkish member of the BoE Monetary Policy Committee who wrote a report on Tuesday to legislators, stated that the prospect of a persistently higher inflation implied “a need for a tighter monetary policies”.

She said that the financial conditions have improved between August and November, when the bank released its forecasting.

Mann continued, “While I do acknowledge that the monetary policies have started to become restrictive, this has only happened recently and by a small amount.”

Mann was among three policymakers to vote for a rate hike of a quarter point at the November meeting of the bank. The MPC majority voted to keep the key rate the same.