Inflation does not have to reach the Bank of England’s desired target before it begins cutting interest rates, the central bank’s governor has claimed.
Andrew Bailey has told the Treasury Select Committee that the Bank could slash the base rate sooner than expected.
The Bank of England has kept interest rates at a 15-year high of 5.25 per cent since August 2023 after a series of hikes to ease inflation.
Previously, the Bank has cited its aim of bringing the Consumer Price Index (CPI) rate of inflation to two per cent.
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Mr Bailey told the Treasury Select Committee that inflation does not need to ease to two per cent for rates to be cut
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However, Mr Bailey’s recent comments suggest the Bank is taking a more flexible approach in order to ensure “sustained progress” when it comes to the economy.
He said: “We don’t need inflation to come back to target before we cut interest rates, I must be very clear on that, that’s not necessary.
“We’ll be looking for sustained progress on those things to reach that judgment about how long this period of restrictive policy needs to be.”
The Bank of England’s governor highlighted that he is looking for key changes when it comes to services inflation, pay and the labour market.
Mr Bailey explained: “We’ve seen, I think, encouraging signs on them. So, services inflation is still above six per cent, there are some signs of it coming down now.
“I think some signs that pay is now adjusting down towards the lower headline inflation, which is what I’d expect to see.
“The quantity side of the labour market remains tight, there’s no question about that. But it’s the progress of those three things.”
While the Bank’s series of rate rises has been beneficial for savers, homeowners and debt borrowers have been saddled with soaring repayments.
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The Bank of England has kept interest rates at 5.25 per cent
PADespite the CPI rate remaining at four per cent in recent months, analysts are betting on significant cuts to the base rate later in the year.
Former chief economist Andrew Haldane has warned that the Bank of England risks worsening the UK’s recession woes if interest rates are not cut soon.
The central bank’s Monetary Policy Committee (MPC) will next announce any changes to the base rate on March 21, 2024.
The Office for National Statistics (ONS) will publish the CPI inflation rate for the 12 months to February 2024 on March 20.
