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(Bloomberg) — Bank of England Governor Andrew Bailey cautioned that it is too early to consider interest-rate cuts, warning households are yet to feel the full effect of the Iran war.
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Speaking in Sintra, Portugal, on Wednesday, Bailey said reductions to borrowing costs are “off the table at the moment” even as the threat from inflation recedes following the plunge in energy markets.
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He warned of a “delayed reaction” to the conflict due to the UK energy price cap, which resets only every three months. The cap, which limits how much suppliers can charge households per unit of gas and electricity, rose 13% on Wednesday, reflecting past increases in wholesale costs.
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“It’s appropriate at the moment to borrow a soccer analogy: I’m afraid, we always look a bit better in the first half than we do in the second half,” Bailey said at the European Central Bank’s conference.
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Bailey has struck a dovish tone in recent months, preferring a wait-and-see approach over whether to hike interest rates to tackle any inflation shock from the war in Iran. Alan Taylor, a prominent dove on the Monetary Policy Committee, has gone further, saying officials need to be ready to cut rates should a benign scenario on inflation play out.
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Bailey’s strategy appears to have paid off with the threat of inflation quickly retreating after the plunge in energy markets since the US and Iran agreed a truce. Economists now expect UK inflation to peak at a much lower level than those envisaged by the BOE in April.
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Traders have also responded by slashing their bets on rate hikes, and are now pricing in less than a quarter-point of tightening this year.
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However, some officials remain concerned that the energy shock could yet lead to second-round effects on wages and prices. Bailey poured cold water on the idea of returning to rate cuts yet, even as he reiterated that the economy and labor market are “softening.”
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“There was an expectation that we would cut rates this year, that’s not unreasonable in the context of the softening economy,” he said. “That was off the table in March, and is off the table at the moment.”
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