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Andrew Bailey was at pains to stress his resolve to further hike interest rates if necessary on Thursday, as the Bank of England governor warned there was a long way to go before policymakers could relax about inflation.
But if bleak forecasts laid out by the bank prove accurate, Bailey will face mounting political pressure in 2024 to start easing policy given the economic strains that lie ahead for households and businesses.
The BoE’s outlook for the UK economy was grim, even if the bank did not predict an outright recession as its Monetary Policy Committee voted to hold rates at 5.25 per cent. The bank said the economy will barely grow for the rest of the year before flatlining for all of 2024.
Unemployment would reach 4.7 per cent at the end of next year, while household consumption flatlines and credit availability for businesses declines, the bank predicted.
“The MPC is saying that the UK economy is in for another year of stagnation — and even though it’s not forecasting a recession, one is perilously close,” said Thomas Pugh, economist at the audit firm RSM UK.
The punishing months ahead will coincide with the run-up to the next UK general election, which is expected in 2024 and must happen by January 2025 at the latest.
The BoE was blunt in acknowledging its own responsibility for the slumping outlook after increasing interest rates 14 times in a row before the past two decisions to hold.
But Bailey made clear his view that the bank’s battle against the worst inflationary upsurge in decades was far from over. The BoE’s prediction was that while inflation will fall in the short-term, reaching the bank’s 2 per cent target will take until 2025 — later than previously predicted.
“I want to re-emphasise this message that we are going to have to maintain restrictive policy in order to get back to target . . . and we have got a distance to travel yet,” Bailey told reporters. “That is the key message.”
Paul Dales of Capital Economics said that Bailey and his colleagues were sending a hawkish message because they do not want markets to conclude that rates will fall anytime soon, loosening financial conditions. “They know the job on inflation is not done yet,” he said.
Bailey’s messaging chimed with the US Federal Reserve, which also held rates this week after similar decisions from the European Central Bank and Bank of Canada. Jay Powell, the Fed chair, insisted on Wednesday that the key question he and his colleagues are asking is “should we hike more?”
But Bailey, unlike Powell, painted a portrait of a decidedly sickly economy. The Fed met against a backdrop of faster-than-expected economic growth, as strong consumer spending drove a 4.9 per cent annualised increase in GDP in the third quarter. By contrast, the UK economy likely recorded zero growth in the most recent quarter and will do little better in the final three months of the year, the BoE said.
The US central bank suggested that accelerating jobs growth was being driven by a rising labour supply, providing the economy with more scope to expand without exacerbating inflation.
But the BoE lifted its estimate of the rate of unemployment that is compatible with steady inflation, meaning more people will need to be out of work to subdue inflationary pressures.
The prediction was coupled with a more downbeat assessment of potential output, highlighting the bank’s concerns about the UK’s ability to grow its economy without exacerbating price rises.
Ben Broadbent, Bank of England deputy governor, stressed that “we have taken a more pessimistic view of the supply side of the economy”, partly on the back of slow productivity and GDP growth, which has been coupled with “still stubborn inflation”.
Nevertheless, investors remained sceptical at Bailey’s warnings that the MPC might hike further. Swaps markets place only a 25 per cent probability of one more rate rise by February next year.
The debate in markets is instead focused on the likely timing of the first UK rate cut, given weaker activity in sectors including services and manufacturing, alongside a loosening labour market.
“We think the MPC will pivot to reducing bank rate next year faster than it is prepared to admit,” said Samuel Tombs of Pantheon Macroeconomics.