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Bank of England governor Andrew Bailey said on Friday he was “cautiously optimistic” about inflation, but it was “too early to declare victory” after an extended period of elevated price rises.
Bailey’s caveated comments, in a speech at the Jackson Hole summit of central bankers, contrasted with the more decisive language from Federal Reserve chair Jay Powell, who said on Friday that “the time has come” for interest rate cuts in the US.
The BoE cut interest rates this month for the first time in four years. The central bank reduced its benchmark rate from 5.25 per cent to 5 per cent, after consumer price inflation fell from a 41-year high of 11.1 per cent in October 2022 to the BoE target of 2 per cent in May and June.
Inflation ticked up less than expected to 2.2 per cent in July, according to official statistics published last week.
Financial markets expect the BoE to hold interest rates unchanged in September, with another cut priced in for November.
“Recent experience leads me to be cautiously optimistic that inflation expectations are better anchored as a result of the regimes we have in place,” Bailey said in his speech.
“The second-round inflation effects appear to be smaller than we expected. But it is too early to declare victory.”
Bailey believed “tentatively” that “the economic costs of bringing down persistent inflation — costs in terms of lower output and higher unemployment — could be less than in the past”.
He expected a steady period of falling inflation, “more in keeping with a soft landing than a recession-induced process”.
Bailey said the scale of intrinsic persistence of inflation, which has led to a faster rise in prices and wages in response to external shocks, has been “harder to judge”.
However, he noted that “we are now seeing a revision down in our assessment of that intrinsic persistence, but this is not something we can take for granted”.
In a question and answer session after his speech, Bailey spoke about the limits to the central bank’s tools.
“I don’t think we should in any sense overdo what we can do about price level,” he said, citing the impact on inflation caused by the war in Ukraine.
“Could we do anything about the imported food prices in the face of what happened in Ukraine? No, I think we shouldn’t assume that we can, because we’re headed for trouble otherwise.”