Bank could be more aggressive in cutting interest rates, says Bailey

Andrew Bailey has said that the Bank of England could become a “bit more aggressive” in lowering interest rates if inflation continues to dissipate but warned that oil prices may spiral if a full-blown conflict between Iran and Israel were to break out.
The Bank of England governor’s suggestion that the monetary policy committee (MPC) could accelerate the pace of policy loosening put strong downward pressure on the pound. Sterling fell by 1.05 per cent to $1.31 but a portion of that decline is likely to have been fuelled by traders flowing into safer assets amid an intensification of the Middle East conflict.
In an interview with The Guardian, Bailey said that the escalation in tensions in the Middle East was “very serious” and raised the prospect of a 1970s-style oil crisis should the conflict reach breaking point.
Bailey, 65, said that the “conversations I have with counterparts in the region is that there is, for the moment, a strong commitment to keep the market stable”.
But he also warned: “There’s also recognition there’s a point beyond which that control could break down if things got really bad. You have to continuously watch this thing, because it could go wrong.
“From the point of view of monetary policy, it’s a big help we haven’t had to deal with a big increase in the oil price but obviously we’ve had that experience in the past, and in the 1970s the oil price was a big part of the story.”
UK inflation has dropped to 2.2 per cent from a peak of 11.1 per cent in October 2022.
Over the past two days, the prices of a barrel of Brent Crude and WTI, the international oil price benchmarks, have climbed rapidly to more than $70 following Israel’s incursion into southern Lebanon and Iran’s volley of missiles in retaliation.
Prices had been steadily declining this year thanks to sluggish demand in China and speculation that Saudi Arabia could expand supply.
The MPC, including the governor, voted 8-1 in favour to hold the UK base rate at 5 per cent at their previous meeting last month. The panel lowered rates by 25 basis points in August, the first reduction since March 2020. Traders expect one more quarter-point reduction next month.
Bailey responded to accusations from Liz Truss, the former prime minister, that he was part of a left-wing economic cabal that plotted her downfall. Speaking in reference to the pension crisis after Truss’s mini-budget, Bailey said: “I remember Liz Truss saying at the time: ‘It’s a financial stability issue; it’s the Bank of England’s job to deal with it.’ We did. We came in and we used our intervention tools and dealt with it.”
Truss’s £45 billion of surprise, unfunded tax cuts pushed up interest rates sharply, which, in turn, forced down bond prices. This prompted a wave of selling by pension funds in order to generate quick capital to fulfil payment obligations, further raising rates and prompting the Bank of England to undertake a limited bond-buying programme, which quelled the panic.
“It is a bit ironic for somebody who is so critical of regulators to then come out and say the problem is that the Bank of England wasn’t regulating,” Bailey said.
The governor added that Rachel Reeves, the chancellor, “is right to focus on how to encourage capital investment” to address climate change and stagnant productivity growth.
Reeves and Sir Keir Starmer’s gloomy framing of the UK economy since Labour won the election in July has pushed down business and consumer confidence sharply. The government is expected to raise taxes at the October 30 budget but offset some of this fiscal tightening with greater public investment.
Behind the story
When central bankers speak, people listen. Andrew Bailey knows this and uses his comments in between interest rate meetings to shape investors’ expectations (Jack Barnett writes).
It is telling, then, that Bailey struck a dovish tone on borrowing costs in his most illuminating interview since the central bank’s last meeting in September.
Predicting that the monetary policy committee, the nine-strong panel that sets UK interest rates every six weeks or so, could become “more aggressive” in its loosening cycle is a slight break from the Bank’s recent rhetoric.
In the September MPC statement, the Bank said: “In the absence of material developments, a gradual approach to removing policy restraint remains appropriate.”
It did, however, note that there was “range of views” on the committee over how quickly price pressures would ease. This signalled that some of the eight members who backed the latest rate hold – most likely the four that voted to cut rates in August – are unconvinced that inflation will remain above target in the long term.
How aggressive the Bank of England will be is reliant on incoming economic data confirming the majority view on the MPC that inflation has finally been tamed having stabilised at 2.2 per cent, within a whisker of the 2 per cent target.
Megan Greene and Catherine Mann, the group’s hawks who have more frequently voted to hold rates, are unlikely to share this judgement.
Stuttering growth in Europe has ramped up predictions for more rate cuts by the European Central Bank. Similar worries justified the US Federal Reserve’s larger half-point cut last month.
UK growth has exceeded expectations this year which, alongside high services inflation, convinced traders that the Bank of England would lag behind its peers in lowering rates. This dynamic has strengthened the pound.
However, with business and household confidence sliding owing to Labour’s gloomy framing of the economy and uncertainty about what Rachel Reeves will announce at her first budget later this month, growth concerns could also grip Bailey and the MPC.