Bank of England chief: Interest rate cut is an ‘open question’
The governor of the Bank of England has said that an interest rate cut in March was an “open question” as policymakers suggested the jobs market would remain weak over the coming months.
Appearing before the Treasury Select Committee on Tuesday, Andrew Bailey said he had not seen enough evidence to back an interest rate cut at the Bank’s previous meeting earlier this month.
But he suggested that there was an “open question” about the merits of loosening monetary policy in March.
Bailey’s comments are likely to hold sway over City traders given the governor has been the swing voter in most of the Bank’s latest interest rate decisions.
“We are seeing some softening of the labour market,” he said.
“I think a key question is, will this fall in headline inflation… get reflected through into expectations with inflation, as is normally the case? And then how long will that take to feed through into people’s inflation expectations and then into, for instance, wage bargaining?
“For the moment, we are still a little way off the next meeting, it is a genuinely open question.”
Other Monetary Policy Committee members who were present at the hearing before MPs included external members Alan Taylor and Megan Greene, as well as the Bank’s chief economist Huw Pill.
Hawks raise alarm on interest rates
Pill and Greene took a more hawkish stance on interest rates, with the latter stating she was a “little bit worried” that a fall in inflation to two per cent this year would not feed through into expectations and long-term changes in price-setting.
Greene signalled that higher interest rates could help prevent inflation from bouncing back up.
“Bearing down on those inflationary pressures remains necessary while there is still work to do,” she said.
Pill also urged MPC members to look past Rachel Reeves’ Budget measures stripping energy subsidies from household bills.
He said: “It’s important that we are not beguiled by the achievement of two per cent headline CPI inflation in the spring off the back of a lot of one-off fiscal measures.”
The chief economist, who has previously called on the Bank to take a more “cautious” approach to cutting interest rates, also attributed the decline in the UK jobs market to longer term trends rather than Reeves’ tax policies.
He suggested the UK was suffering from a period of “unhoarding” where companies were choosing not to hire more workers. Changes to post-Brexit immigration policies, unwinding from the Covid furlough scheme and fluctuations in activity rates had had a “structural change” on the UK economy.
“From my perspective, we are getting to a point where the labour market is showing signs of stabilisation,” Pill said.
However, the chief economist argued that Reeves’ changes to employers’ national insurance contributions and efforts to equalise the minimum wage for young adults with the national living wage had contributed to a sharper rise in youth unemployment, which is now at around 16 per cent.