The Bank of England governor has welcomed the “good news” about inflation but warned that it will not cut rates immediately if, as expected, prices fall to just 2 percent this spring.
Andrew Bailey responded to figures that showed the annual inflation rate was unchanged in January at 4 percent, lower than the Bank’s forecast of 4.1 percent and defying the expectations of most economists for an acceleration at the beginning of the year.
“We slightly undershot last month and slightly overshot this month. This pretty much leaves us right where we were (on inflation),” he said to the House of Lords Economic Affairs Committee.
He said that evidence of a slowing in price growth over the past few months had led to the Central Bank moving from “the question of how restrictive we need to make our policy to return to target sustainably”, to “how long can we maintain this stance to achieve that”. “This is a significant and important change. The inflation figures of today leave us in exactly that situation.
In January, the inflation basket recorded a 0.6% decline on a month-to-month basis. This was due to a drop in food prices, furniture prices and energy costs. Bailey predicted that there would be more good news about inflation in the months to come, since the reset of Ofgem’s energy price cap will help bring the annual inflation rate to Bank’s target in April.
He said that it would not automatically trigger a rate cut, despite the growing market speculation that Bank of England’s monetary policy committee that sets rates will start easing interest rates this summer following two years aggressively increasing borrowing costs. According to the Bank’s projection, inflation will start to increase steadily in the spring and end the year just below 3%.
“It appears that we will see a further drop in [inflation] from now until spring. Then, the [energy] basis effects will begin to reverse. It’s our job to bring inflation back to the target. “What happens in spring will determine our monetary policies.”
Bailey’s remarks come after figures released this week revealed that unemployment is still declining and wages have not decreased as much as economists predicted. Bailey stated that the 6.2% increase in earnings is still a “marked decrease in pay growth but not as far as economists had thought.” We need more evidence to be convinced we’re on track to bring down inflation sustainably.”