Andrew Bailey said that UK Interest Rates will continue to fall over the next few months, amid fears that the US rate cut may be delayed due to stubborn inflation.
The Bank of England Governor stated that he had “strong evidence” of continued declines in inflation, despite British job market’s resilience.
At the International Monetary Fund’s (IMF) Spring Meetings in Washington, he said: “Our judgment with interest rates is what do we need now to be confident about the process?”
Mr Bailey made his comments as the Chairman of the US Federal Reserve expressed doubts about its ability to lower rates this year and warned that borrowing costs would likely remain higher due to persistent inflation.
Jerome Powell, speaking at an event held in Washington DC Tuesday, said that the recent data had not increased his confidence. Instead it indicated that it would take longer than expected for him to reach that level of confidence.
Jerome Powell stated that higher borrowing rates would need “further work time” due to the strong US economic.
Mr Powell pledged to keep rates in their current range between 5.25pc and 5.5pc “for as long as necessary”.
The remarks from both central bank leaders will fuel speculation about the Bank of England cutting before the Federal Reserve.
Mr Bailey stated that the UK, Europe and the US have very different factors that drive inflation. He expects the UK to see a drop to 3.1pc from 3.4pc on Wednesday.
He said: “I believe there is more inflation-driven demand in the US than what we are seeing.” “I think that the inflation dynamics in the US are different.”
Jeremy Hunt told Bloomberg, during a trip to New York, that he believes the UK’s high inflation period is “well and truly over”.
Mr Bailey’s remarks came after the stock markets in Europe had closed, when fears of conflict with Iran as well as delays in US rate reductions triggered a sharp sell-off.
The FTSE 100 had its worst day for nine months with a drop of 1.82pc. European markets have also seen falls of over 1pc.
After a series of positive economic indicators, the hopes of multiple rate reductions in the US, which would have fueled global growth, faded.
US inflation was 3.5pc, higher than the economists’ forecast.
As borrowing costs and capital costs increase, high interest rates can cause shares to fall. Equities are also competing with other investments like bonds or cash that offer higher returns.
Trevor Greetham is the head of Multi Asset at Royal London. He said that investors are “swinging” between concerns over an expanding Middle East conflict, and fears about a stronger US economy and/or higher core prices, which could make it harder for central banks cut interest rates by as much as they had hoped.
The markets started the day in a negative mood after Israel’s army Chief General Herzi Halevi said that the country was forced to respond to Iran’s barrage more than 300 rockets.
Brent crude oil, which is the benchmark for international prices, briefly rose to $90 per barrel, before falling again, as Israel failed to take any action.
Warren Patterson, ING’s head of commodities strategy, stated that the possibility of Tel Aviv retaliating against Iran “means this uncertainty and tension is likely to last for quite some time”.
EasyJet has cancelled all flights to Israel during the summer due to increased tensions. EasyJet’s services that were scheduled to resume Sunday will now not operate until the beginning of the winter schedule in October.
At the IMF event Mr Bailey stated that the global economy was resilient despite geopolitical stabilization. He said: “I believe we are seeing very encouraging signals.” I think that we are seeing a resilience in activity within the global economy. But we also see disinflation.
He warned, however, that “fragmentation”, a serious problem remained as he encouraged politicians to support the free trade.
The Governor stated: “I acknowledge that our experiences have taught us that we must diversify in order to increase our resilience and international connections. But that doesn’t mean that we should give up on free trade.”