By David Milliken and William Schomberg
LONDON (Reuters) -The Bank of England is "much nearer" to ending its run of interest rates increases but borrowing costs might still have further to rise because of stubborn inflation pressures, Governor Andrew Bailey said on Wednesday.
"I think we are much nearer now to the top of the cycle. And I'm not therefore saying we're at the top of the cycle because we've got a meeting to come," Bailey told lawmakers.
"But I think we are much nearer to it on interest rates on the basis of current evidence."
The BoE has raised rates at each of its last 14 meetings as it grappled with the highest inflation among the world's big, rich economies. It is expected to raise borrowing costs again later this month, taking Bank Rate to 5.5%.
British two-year and 10-year gilt yields fell to their lows of the day after Bailey's comments to parliament's Treasury Committee.
In May, Bailey told the same panel of lawmakers that the BoE was "nearer" to the peak in interest rates. After that, the central bank increased Bank Rate in June and in August.
In recent weeks, senior officials at the BoE have stressed that even if rates are close to peaking, they are unlikely to fall quickly as the central bank seeks to ensure inflationary pressures are squeezed out of the economy.
INFLATION EXPECTATIONS AND WAGE TALKS
In his question-and-answer session on Wednesday, he said British inflation was heading for a further marked fall but it was not yet clear how much that would reduce the pace of wage growth, which recently hit a record high.
"Many of the indicators are now moving as we would expect them to move, and are signalling that the fall in inflation will continue and - as I've said a number of times - I think will be quite marked by the end of this year," he said.
"The question now is as headline inflation comes down, will we see inflation expectations continue to come down? And will that be reflected into wage bargaining?"
Britain's economy has shown signs of weakening in the face of the sharp climb in borrowing costs but so far there has been no let-up in the pace of wage growth, a big worry for the BoE as it assesses how much further it needs to raise rates.
"We're still seeing in my view anyway quite a slow cooling of the labour market," BoE Deputy Governor Jon Cunliffe told the same session of the Treasury Committee, adding that upward pressures on pay were now crystallising.
Even so, future rate decisions would be "very finely balanced", Cunliffe said, echoing similar language used by Bailey. Cunliffe also said the BoE saw mixed signals on the economy that were typical of a turning point.
But another member of the BoE's Monetary Policy Committee, Swati Dhingra, repeated her warning that interest rates were already high enough and further increases would threaten to hurt the economy.
"Policy is already sufficiently restrictive, and the lagged effects of further tightening pose serious risks of output volatility in order to make a small dent on inflation," Dhingra said in an annual report to parliament.
"While each additional increase in Bank Rate intensifies the effect on currently exposed subsets of the economy – for example those rolling off fixed-rate mortgages - it takes time for the breadth of the effects to increase."
Dhingra has voted to keep rates on hold at recent MPC meetings.