THE Bank of England should be able to lower interest rates gradually as it gains confidence that inflation will remain close to its 2 per cent target, governor Andrew Bailey said in an interview published on Tuesday (Sep 24).
Bailey said he was “very encouraged” by the downward path of inflation since it peaked at 11.1 per cent nearly two years ago.
“I do think the path for interest rates will be downwards, gradually,” he told the Kent Messenger newspaper.
“Inflation has come down a long way,” Bailey added. “We still have to get it sustainably at the target and we have quite an unbalanced mix of components of inflation at the moment.”
British inflation was 2.2 per cent in August but the central bank remains concerned about high rates of growth in services prices and regular wages, both of which are rising at an annual pace of more than 5 per cent.
Asked where interest rates would settle, Bailey said he did not expect them to return to the historic lows close to zero last seen four years ago, and his best guess was that it would settle at a neutral rate which he was unable to specify.
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Last week the BOE kept its main interest rate unchanged at 5 per cent after cutting it from a 16-year high of 5.25 per cent in August.
Economists polled by Reuters expect the BOE to cut rates to 4.75 per cent at its next meeting in November.
Last week Bailey said he was optimistic rates would fall further, but also said cuts would need to be gradual and the BOE needed “to be careful not to cut too fast or by too much”.
Bailey spoke to the Kent Messenger during a visit to southeast England, including the port of Dover, the main route for freight and much passenger travel between Britain and continental Europe.
Asked about the economic impact of Brexit, Bailey said: “What we have seen, there will be some short-term painful effect on trade. But over a longer period of time … that trade will be redirected.” REUTERS
