PoundSterlingLIVE - Above: Policy panel with Andrew Bailey, Governor at the Bank of England, Christine Lagarde, President of the European Central Bank, Jerome Powell, Chair at the Board of Governors of the Federal Reserve System and Kazuo Ueda, Governor at the Bank of Japan at the ECB Forum on central banking, 28 June 2023 in Sintra, Portugal. © Sérgio Garcia/Your Image for ECB.
The Bank of England pushed back against market expectations for it to start cutting interest rates from early 2024, warning inflation would prove too persistent in nature to facilitate an early return to lower rates.
Speaking at the European Central Bank's Sintra conference, Governor Andrew Bailey indicated the Bank was leaning towards a 'higher for longer' policy on interest rates, questioning the market's expectation for the peak in Bank Rate to "be short-lived."
He warned this is "a world where we're dealing with more persistent inflation."
The Bank of England raised interest rates to 5.0% last week and money market pricing shows investors are looking for the peak in Bank Rate to reside closer to 6.0% as the central bank grapples with persistently high inflation.
Bailey's message is that inflation won't necessarily fall at the speed required to consider cutting interest rates again, noting that the UK's labour market remained too tight to entertain such a development.
He said Covid was responsible for a supply squeeze in workers that meant unemployment was likely to stay low and wages elevated.
Inflation is nevertheless still expected to come down, leaving investors guessing as to where the peak in rates will be.
"The market, I don't think, thinks we're nearly done at the moment. They've got a number of further increases priced in for us. My response to that would be: Well, we'll see," said Bailey.
Above: Market implied expectations for changes in Bank Rate showing an anticipation for rate cuts soon after the peak is reached. Image courtesy of Goldman Sachs (NYSE:GS).
Bailey reiterated the Bank will continue to be led by the data, meaning July's inflation report will be crucial in cementing Bank Rate expectations.
"Judging by the likely outlook for inflation and recent trends in the fundamentals driving prices, the BoE should not need to go to the 6% the OIS markets indicates," says Kallum Pickering, Senior Economist at Berenberg Bank.
Berenberg looks for a further rate hike in August but says beyond there uncertainty grows as much depends on the data.
"We look for 25bp in August and a further 25bp in September to take the bank rate to a peak of 5.5%. The risks to this call are skewed towards a ‘one and done’ 50bp hike in August, with perhaps one further 25bp hike in September to take the peak rate to 5.75%," says Pickering.
Analysts at Schroders (LON:SDR) have meanwhile raised eyebrows by raising their prediction for the peak in Bank Rate to 6.5%, saying the Bank of England is firmly set on prioritising inflation over growth.
The broker had previously forecast a peak in Bank Rate at 5%.
An original version of this article can be viewed at Pound Sterling Live