Indicating a positive turn in its economic trajectory, Britain exhibits signs of recovery following a mild recession, as affirmed by the Bank of England governor. The anticipation of a forthcoming boost is grounded in the announcement of impending interest rate reductions later this year.
Bank of England Governor Signals Rate Cuts Amid Recession Recovery
Andrew Bailey dismissed allegations that the Bank of England's hesitancy to lower borrowing costs amid declining inflation indicated a lag in responsiveness, asserting that rate cuts are indeed on the horizon.
Faced with inquiries from Conservative members of the Treasury committee concerning the UK's recession in the latter half of 2023, Bailey emphasized that waiting for inflation to return to target is not a perquisite for initiating interest rate reductions.
“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 later remarked.
Last year's two consecutive quarters of negative growth resulted in a mere 0.5% decline in GDP, according to Bailey. Comparing this downturn to recessions dating back to the 1970s, he highlighted its notably weaker impact. Bailey pointed out that previous recessions had seen the economy contract by a range of 2.5% to 22% over the two quarters, underscoring the relatively mild nature of the recent economic contraction.
Currently, the annual inflation rate is at 4%, but according to Bailey, he foresees a temporary return to the 2% target in the next few months, followed by a rise to 2.75% by the end of this year.
The Bank's latest inflation forecasts are grounded in the anticipated trajectory of interest rates in financial markets, hinging on the assumption of the first borrowing cost reduction occurring in either in June or August this year.
Notably, Goldman Sachs adjusted its earlier prediction, now expecting the initial rate cut in June after previously forecasting it for May.
Bailey highlighted: “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.”
Bank of England Faces Questions on Delayed Interest Rate Reduction
Conservative MP John Baron inquired why interest rates were not already being reduced, emphasizing the flashing red warning signs in the economy.
In response, the governor explained that the crucial consideration for the Bank was determining the duration for which interest rates must remain restrictive to achieve sustainable inflation within the target range. Emphasizing that the economy had not yet reached that point, he clarified, "We are not there yet."
The governor highlighted "encouraging signs" as inflation in the services sector and earnings growth, critical factors considered by the MPC when determining rates, showed signs of moderation.
This assessment was echoed by Ben Broadbent, a deputy governor at the Bank, who supported Bailey's perspective that rate cuts were likely in the forthcoming months.
Broadbent's annual report to the Treasury committee indicated that the Bank's forecasts do not preclude a policy easing in 2024, emphasizing: “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.”