BoE’s Bailey: We need to make sure inflation stays low

Bank of England (BoE) Governor Andrew Bailey said the decision to cut the policy rate by 25 basis points was taken in a very balanced manner and refrained from giving any clear signals about possible rate cuts for the rest of the year.

BoE Governor Bailey spoke at a press conference following the decision to cut the policy rate by 25 basis points to 5 percent.

Bailey said the interest rate cut, which was taken after headline inflation in the country remained in line with the BoE’s 2 percent target for two consecutive months, was a “fairly balanced decision” and that inflationary pressures had decreased as expected.

Bailey said the economy has been strong in recent months but remains below its potential. “However, we need to make sure that inflation remains low. We need to put the period of high inflation completely behind us. We expect inflation to rise to 2.75 percent for the rest of the year and then return to our target of 2 percent. In this respect, there is still a question mark as to whether the persistent component of inflation will fall to levels consistent with the 2 percent target.”

Bailey, who stated that the bank will closely monitor inflation in the service sector in particular, said the Monetary Policy Committee is extremely aware of the risks associated with persistent inflation.

“We will make decisions from meeting to meeting as we always do,” Bailey said, without giving a clear signal or date on possible new rate cuts.

Bailey, who did not comment on market expectations for a rate cut, said it was unlikely that interest rates would return to neutral levels after the 2009 financial crisis.

Bailey said the new government’s planned 5.5 percent pay increase for public employees would have little or no impact on inflation, and added that they should be very careful about whether the escalating tensions in the Middle East would lead to higher inflation pressures.

BoE Deputy Governor Dave Ramsden also said that everyone at the MPC sees the need for some degree of policy rate restraint.