Andrew Bailey Pushes Back Against U.K. Market Reaction To BOE Decision

Andrew Bailey

(Bloomberg) -- Bank of England Governor Andrew Bailey pushed back against the market's reaction to its latest decision after investors built up bets on interest rate cuts in the UK next year.

“If the market has taken from what we have published today a view that we are leaning towards more cuts, then I'm afraid I will lean against that, yes,” Bailey said Thursday in an interview with Bloomberg TV.

Traders ramped up wagers on lower rates Thursday afternoon despite Bailey insisting that it was “much too early” to be talking about when to lower interest rates. Instead, the BOE said policy makers remain focused on whether to boost rates again to bring down inflation that remains more than triple its 2% target.

The BOE kept its benchmark lending rate on hold at 5.25% for a second straight meeting and reiterated guidance warning that policy will be “sufficiently restrictive for sufficiently long.” However, it also predicted a stagnant economy in the coming 12 months and that inflation will undershoot the BOE target by the end of its forecast.

The meeting boosted expectations for when policy makers might start lowering the key rate. Traders fully priced in the first reduction for September 2024 followed by another move downward by the end of the year.

Bailey told Bloomberg that “we've still got a long way to go” in the battle against inflation. He said the BOE has to lean against building speculation over cuts and warned there are still risks to inflation.

Bailey mentioned risks from the Israel-Hamas war causing turmoil in energy markets and a tight labor market.

“We still see the risks to inflation as being on the upside at the moment and it's important for that message not to get lost,” he said.

Traders often look for clues on the future path of policy from the two inflation forecasts published by the BOE, which are based on a constant 5.25% rate and the market path for rates. The BOE's latest outlook based on a market path in mid- to late-October, which included bets on cuts, was closer to the 2% target by the end of the forecast than its constant rate projection.

“There's not much between these paths and that supports the story that we're saying, which is that we're going to have to maintain this stance for an extended period,” Bailey said.“I'm not leaning against the curve that we used when we did the forecast because frankly,. There wasn't a lot of difference between those two views of the constant throughout and the market then.”

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