Britain is showing signs of recovery from its mild recession and will receive a boost when interest rates start coming down later this year, the Bank of England governor has said.
Andrew Bailey rejected accusations that Threadneedle Street’s reluctance to cut borrowing costs despite falling inflation meant it was “behind the curve” and made it clear rate cuts were coming.
“We don’t need inflation to come back to target before we cut interest rates,” Bailey said as he came under pressure from Conservative members of the Treasury committee to respond to news that the UK fell into recession in the second half of 2023.
“The economy seems to be at full employment and that’s a very good story,” the governor said. In comparison to previous downturns, the UK was suffering from a “very small recession” and was now showing “distinct signs of recovery”, he added.
The two quarters of negative growth last year only added up to a 0.5% drop in GDP. “If you look at recessions going back to the 1970s, this is the weakest by a long way,” Bailey said. The range for previous recessions was for the economy to contract by between 2.5% and 22% over two quarters, he added.
The annual inflation rate currently stands at 4% but Bailey said he expected it to come back to its 2% target temporarily within the next few months before rising to 2.75% by the end of 2024.
The Bank’s latest forecasts for inflation are based on the predicted path of interest rates in the financial markets, and these assume the first cut in borrowing costs in June or August this year.
On Tuesday, Goldman Sachs said it expected the first rate cut to be made in June. It had previously forecast this would take place in May.
Bailey said: “I am comfortable with an interest rate profile that has cuts in it. What I am not saying is by how much they will be cut and when.”
Conservative MP John Baron asked why rates were not already being cut given that the economic warning signs were “flashing red”.
The governor said the question for the Bank was how long interest rates needed to remain restrictive to bring inflation sustainably back to target. “We are not there yet, he said.
The governor said there were “encouraging signs” inflation in the services sector and earnings growth – two of the key factors the MPC takes into account when setting rates – were moderating.
Ben Broadbent, one of the Bank’s deputy governors, supported Bailey’s view that rate cuts were probable over the coming months.
In an annual report to the Treasury committee, Broadbent said the Bank’s forecasts don’t rule out an easing of policy in 2024, adding: “In my view, that is the more likely direction in which Bank rate is likely to move. But even if that proves to be the case, the timing of any adjustment can only depend on the actual evolution of the economic data.”
