by The Bank of England believes the worst price rise is over, but it’s too early to declare victory over inflation.
Governor Andrew Bailey told a news conference that the Bank has seen “the first signs that inflation has turned a corner” since its last monetary policy report in November.
He pointed out that UK consumer price inflation fell to 10.5% in December, from 11.1% in October.
However, he warned that inflation could not fall below the 2% target early next year unless energy prices fall.
Bailey also warned that for inflation to come down, higher wage expectations must not be incorporated into the workforce.
“It is still too early to declare victory. Inflationary pressures are still there,” the governor said.
Deputy Governor Ben Broadbent told reporters the BoE was also concerned about prices.
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“It’s not just about wages. And the truth is, when they bid on each other, we don’t end up better off.
Markets believe the central bank could start to ease with hikes this summer, a sentiment that Bailey has not refuted.
Bailey said: “The extent to which inflationary pressures ease will depend on how the economy develops and the impact of the significant bank rate hikes so far.”
He added: “Should there be evidence of more persistent pressures, further tightening of monetary policy would be needed.”
But he said the Monetary Policy Committee has softened its language on future interest rate hikes because the economy is turning a corner on inflation.
“I think this reflects the fact that we have seen a breakthrough, but it’s early days and the risks are very big. And that’s really what shapes where we’re going to go from here.
“If these risks emerge and if we continue to get overshoots as we’ve seen, particularly in payroll data and services inflation, then we’re going to have to respond to that, because that would be evidence that these risks are crystallizing.
“If the economy were to evolve as the central case of the forecast suggests, then we should reevaluate as we always do.”
Alexander Batten, fixed income portfolio manager at Columbia Threadneedle Investments, predicts the Bank of England is about to end its interest rate hikes.
He said: ‘The Bank’s forward guidance has been watered down further. Language around steep hikes, i.e. 50 basis points or more, has been removed and further tightening has been linked to evidence of the emergence of more persistent inflationary pressures. The Bank has indicated the data it is watching for this item: wages, services inflation and inflation expectations.
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“Weak data suggests a significant weakening in the labor market, but we suspect this may not come soon enough to prevent a final 25 basis point hike in March.”
Moody’s Analytics economist Thomas Sgouralis says today’s rate hike won’t be the last in this cycle.
“The Bank of England raised rates from 3.5% to a 14-year high of 4%, the tenth consecutive hike in the policy rate since December 2021, underlining its fight against inflation in the UK, which it is the highest among the G7 economies.
“Despite inflation showing signs of moderating and with a vulnerable economy, today’s meeting is unlikely to mark the end of the tightening cycle. We expect the BoE to take the policy rate to 4.5% before of the pause, as inflation is expected to start declining significantly from mid-year onwards as energy costs and consumption decline.
The Brexit blow is coming faster than expected
Broadbent also said that the impact of Brexit on the economy is coming faster than expected.
He said it was unclear whether the effects of Brexit were a reason the UK was expected to do worse than other major economies this year.
The International Monetary Fund (IMF) warned earlier this week that Britain would be the only major economy to see a contraction this year and the Bank said it also saw output for the UK this year. year be weaker than the eurozone or the United States.
Broadbent said Brexit was one factor impacting the UK economy, but also a shrinking job market, greater dependence on gas than other countries and a higher pass-on of interest rates to borrowers .
Broadbent said: “Brexit… has been something that has attracted our potential manufacturing to our country and that has been our assessment for many years.
“We haven’t changed our estimate of the long-term effects, but we’ve anticipated some of them and think they’re likely to come faster than we expected.”
He added: “Yes, Brexit is having some effect on growth, although ultimately no greater effect than we assessed a few years ago.
“Based on the trade numbers and to some extent the investment numbers, we believe these effects are coming faster than we initially anticipated.”
The UK will enter a recession this year, but it will be shorter and less severe than previously thought, according to the Bank of England.
The slump is expected to last just over a year rather than nearly two, as energy bills fall and prices rise slowly.
Watch: Interest rates hiked by Bank of England by 0.5 percentage point for 10th consecutive hike
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