Andrew Bailey, Governor of the Bank of England, has indicated that the bank may take a more aggressive stance on cutting interest rates if inflation continues to decline.
However, he warned that escalating tensions in the Middle East could lead to a sharp rise in oil prices, which would complicate the bank’s policy outlook.
Speaking to The Guardian, Bailey suggested that the Monetary Policy Committee (MPC) could accelerate the pace of policy easing if inflationary pressures continue to ease. “There is a possibility that we will be more aggressive in lowering interest rates if inflation continues to fade,” he said. This has already put downward pressure on the pound, which fell 1.05 percent to $1.31, although part of that decline was attributed to traders looking for safer assets amid the growing conflict between Israel and Iran.
Bailey, who has been president of the bank since 2020, expressed his concerns about the situation in the Middle East, warning of the possibility of an oil crisis similar to the crisis of the 1970s if tensions escalate further. “The conversations I have had with my counterparts in the region indicate that there is currently a strong commitment to maintaining market stability,” Bailey said, but added that control of oil markets could deteriorate if the conflict worsens. He pointed to previous experiences in which the rise in oil prices significantly affected monetary policy, pointing to the role that oil played in driving inflation during the 1970s.
The UK saw a sharp decline in inflation, which peaked at 11.1 per cent in October 2022, but has since fallen to 2.2 per cent. Despite this progress, oil prices have risen in recent days, driven by the latest developments in the Middle East. Brent and West Texas Intermediate crude, global benchmarks, rose to more than $70 a barrel after the Israeli incursion into southern Lebanon and Iranian retaliatory missile strikes.
These higher prices come after a year of lower demand from China and speculation that Saudi Arabia may increase supply, trends that pushed prices lower earlier in 2023. The current uncertainty has prompted the Monetary Policy Committee to adopt a cautious approach. The committee voted 8-1 to keep the UK benchmark interest rate at 5 per cent during its last meeting, and although it implemented a 25 basis point cut in August – the first cut since March 2020 – traders are anticipating another cut next month.
Bailey also responded to criticism from former Prime Minister Liz Truss, who accused him of being part of a left-wing economic cabal that undermined her brief premiership. Referring to the pension crisis sparked by Truss’s mini-budget, Bailey said: “We came in and used our intervention tools to deal with the financial stability issue. It is ironic for a critic of the regulators to say that the problem was that the Bank of England was not regulating adequately.”
The pensions crisis came on the heels of Truss’s controversial £45bn package of unfunded tax cuts, which caused interest rates to rise sharply and forced bond prices down, creating liquidity problems for pension funds. The Bank of England was forced to intervene with a limited bond purchasing program to restore market stability.
Looking to the future, Bailey praised Chancellor Rachel Reeves for her focus on encouraging capital investment to address climate change and stagnant productivity growth. He also acknowledged the challenges posed by Labour’s handling of the economy since taking office in July, as the government prepares for its first budget on October 30. While taxes are expected to rise, the Chancellor plans to mitigate the impact by increasing public investment in key sectors.
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