Bank of England Governor Andrew Bailey expressed cautious optimism about inflation on Friday but emphasized that it is “too early to declare victory” following a prolonged period of high price increases.
Bailey’s remarks, delivered at the Jackson Hole summit of central bankers, were more reserved compared to the stronger stance of Federal Reserve Chair Jay Powell, who stated on Friday that “the time has come” for interest rate cuts in the US.
The BoE recently cut interest rates for the first time in four years, lowering its benchmark rate from 5.25 percent to 5 percent. This decision followed a decline in consumer price inflation from a 41-year high of 11.1 percent in October 2022 to the BoE’s target of 2 percent in May and June.
According to official statistics released last week, inflation in July rose slightly more than anticipated to 2.2 percent.
Financial markets anticipate that the BoE will keep interest rates steady in September, with another rate cut expected in November.
In his speech, Bailey noted, “Recent experience leads me to be cautiously optimistic that inflation expectations are better anchored due to the regimes we have in place.”
He added, “The second-round inflation effects appear to be smaller than we expected. But it is too early to declare victory.”
Bailey believed “tentatively” that “the economic costs of bringing down persistent inflation — costs in terms of lower output and higher unemployment — could be less than in the past”.
He expected a steady period of falling inflation, “more in keeping with a soft landing than a recession-induced process”.
Bailey said the scale of intrinsic persistence of inflation, which has led to a faster rise in prices and wages in response to external shocks, has been “harder to judge”.
However, he noted that “we are now seeing a revision down in our assessment of that intrinsic persistence, but this is not something we can take for granted”.
In a question and answer session after his speech, Bailey spoke about the limits to the central bank’s tools.
“I don’t think we should in any sense overdo what we can do about price level,” he said, citing the impact on inflation caused by the war in Ukraine.
“Could we do anything about the imported food prices in the face of what happened in Ukraine? No, I think we shouldn’t assume that we can, because we’re headed for trouble otherwise.”