Unlock the Editor’s Digest for free – Bank of England Governor Andrew Bailey cautiously optimistic about inflation

Bank of England governor Andrew Bailey expressed cautious optimism about inflation in a speech at the Jackson Hole summit of central bankers. Despite recent cuts in interest rates, Bailey emphasized that it was too early to declare victory over elevated price rises.

Bailey’s remarks come in the wake of the BoE’s decision to cut interest rates for the first time in four years, reducing the benchmark rate from 5.25 per cent to 5 per cent. This move followed a period of high consumer price inflation, which peaked at 11.1 per cent in October 2022 before falling to the BoE’s target of 2 per cent in May and June.

While inflation ticked up slightly to 2.2 per cent in July, financial markets anticipate that the BoE will keep interest rates steady in September, with another cut potentially on the horizon for November.

In his speech, Bailey acknowledged the potential economic costs of combating persistent inflation but expressed hope that the current regime would lead to better anchored inflation expectations. He cautiously suggested that the economic impact of reducing inflation could be less severe than in the past.

However, Bailey also highlighted the challenges posed by external factors, such as the war in Ukraine, which could impact inflation through rising food prices. He cautioned against assuming that central banks could fully control such external shocks.

Overall, Bailey’s nuanced assessment of inflation and the central bank’s tools provides insight into the complex factors influencing economic stability and the challenges ahead.