Bank of England Governor said that he expects “quite a fall” in the inflation rate to be around the 2 percent target level when the official figures are released on Tuesday. He also predicted that the central bank will cut interest rates in the near future.
Andrew Bailey says that falling energy prices should help to bring down the rate at which consumer price inflation is measured by the Office for National Statistics in April.
He said that the BoE staff in their most recent outlook had reduced their view on the likelihood of inflation persisting in the future.
The BoE, and the economists surveyed by Reuters, expect headline CPI inflation rates to fall to 2.1 percent in April from 3.2 percent in March.
These numbers will be an important input to the Monetary Policy Committee of the BoE when it meets again in June.
Some economists predict that the MPC will reduce rates in June from the current 5.25 percent.
The reading of the CPI for April will be significant politically as well, since chancellor Jeremy Hunt has claimed that the UK economy has turned a corner following the cost-of-living crisis.
Allies say he will hail the expected fall in inflation to near the BoE target of 2 percent as a sign that the “normal” is returning.
Before the price spike, inflation was commonly hovering just above or below the 2-percent target.
This return to “normality”, for Hunt, will be presented by his economic policy as a success.
Bailey spoke after a London School of Economics lecture on how the BoE would handle the dewinding of its massive balance sheet.
He said that he didn’t know yet what the CPI reading for April would be. However, he added that “I expect quite a decline in the number”, partly because of the changes in the regulation cap on household electricity prices.
Bailey said that the headline inflation will likely be at or slightly above target. We will have to wait and see. But it will certainly be closer than before.
He said that the staff of the BoE had, in their most recent forecasting round, increased their estimate for the share of inflationary rise driven by high import prices — which is now fading.
Bailey also said that the BoE has reduced its estimate of how persistent the inflation will be. This is important to consider when deciding the timing for rate cuts. He added, “I believe the next step will be to cut rates.”
His comments are likely to fuel speculation that the BoE is ready to lower interest rates as early as June. However, the next readings of inflation and the strength on the labour market will also be crucial.
Bailey was asked to comment on recommendations made by the IMF as part of its Article IV health check for the UK economy. One suggestion was that the BoE should hold a press release after each MPC, and not just when they announce their full set economic forecasts.
Bailey admitted that the BoE does not hold as many press conferences about its monetary policy decisions as the US Federal Reserve or the European Central Bank. He said that the BoE will consider this idea when it reviews the recommendations made by former Fed Chair Ben Bernanke, in his report on BoE forecasting.
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