Interest rates could be cut as Andrew Bailey says economy shows 'distinct signs' of upturn

The announcement last week that the UK has entered a mild recession prompted fresh speculation that the Bank’s monetary policy committee (MPC) could cut rates in the spring in order to boost economic growth.

But Andrew Bailey, Governor of the Bank of England has reassured Britons that this was a “weak recession,” and the economy is showing signs of an upturn.

Despite economic pressures, he explained that the interest rate can still fall even if the Bank has not hit its two percent inflation target.

He told the Treasury Committee: “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 think the economy is already actually showing distinct signs of an upturn.”

Currently, the interest rate is being held at 5.25 percent, with many wondering when this will drop.

Mr Bailey told the Commons Treasury Committee that he was monitoring services inflation, wage increases and labour market shortages as the best indicator for when it will be safe to cut interest rates.

He explained that he has seen encouraging signs when looking at these services. Services inflation is still above six percent, however, there are some signs of it coming down now.

He said: “I think some signs that pay is now adjusting down towards the lower headline inflation, which is what I’d expect to see.

The Office for National Statistics (ONS) estimated that gross domestic product (GDP) fell by a worse-than-expected 0.3 percent between October and December, following a decline of 0.1 percent in the previous three months.

It means that the economy entered a technical recession, as defined by two or more quarters in a row of falling GDP.

However, Mr Bailey stated: “If you look at recessions going back to the 70s, this is the weakest by a long way because the range, I think, for the numbers for those two quarters for all the previous recessions was something like 2.5 percent to 22 percent in terms of negative growth, so minus 0.5 percent is a very weak recession.”

Economists said the recession is likely to be short-lived, with GDP expected to pick up from the start of 2024.

Mr Bailey continued: “I think there’s two ways that the UK grows, first of all by restoring price stability, that’s a condition for stable growth. I think we’re well on our way to doing that.

“The second thing is – and this is part of the narrow path we’re having to walk here – that we’ve got weak supply side growth in this country and we have had for some time.

“So, clearly, to get faster growth, we do need to see stronger growth on the supply side. The quantity side of the labour market remains tight, there’s no question about that. But it’s the progress of those three things.”

This comes as former Bank of England boss Andy Haldane said that the UK economy could be “crushed” unless the Bank starts cutting rates.

Mr Haldane said: “It’s one thing to have missed inflation on the way up, which happened, it’s quite another to then have crushed the economy on the way down.

“That double blow to credibility is one if I were a central banker, in my old job, I would be looking to avoid.”

Meanwhile, Swati Dhingra, a fellow member of the MPC, said that if the Bank keeps interest rates high “for longer” that could weigh on some parts of the economy.

She said: “Despite the disinflation at play, and despite the fact that there has been some real wage recovery, we’re still seeing consumption very weak and very different from some of the other advanced economies where there has been a bounce back from the pre-pandemic levels,” she said.

“Here, we aren’t seeing that, even after January’s retail sales, unfortunately, (retail sales are) about 2.1 percent lower.

“I think that suggests to me that the downside risks at this point are substantial and, therefore, if we keep monetary policy tight for longer, that would weigh even further on that sort of real relativity.”


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