Bank: CPI inflation is judged to have peaked
Newsflash: The Bank of England believes the recent rise in UK inflation is over.
Announcing today’s decision to leave interest rates on hold, the Bank declares “CPI inflation is judged to have peaked.”
UK inflation has been recorded at 3.8% in July, August and September – and the Bank is expressing confidence that the process of ‘disinflation’ isn’t over.
Its latest Monetary Policy Report, just released, predicts that inflation is likely to fall to close to 3% early next year before gradually returning towards to the 2% target over the subsequent year.
It says:
Progress on underlying disinflation continues, supported by the still restrictive stance of monetary policy. This is reflected in an easing of pay growth and services price inflation. Underlying disinflation is being underpinned by subdued economic growth and building slack in the labour market.
The Bank had previously forecast that inflation would peak at 4% in September.
Updated at 07.16 EST
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John-Paul Ford Rojas of the Daily Mail says people are worried that income tax will go up in the budget – would that give the Bank any impetus to cutting interest rates in December?
Andrew Bailey sticks to his guns, repeating that the Bank will assess the budget measures when they are announced, rather than speculating about fiscal policy.
Szu Ping Chan of the Telegraph asks whether government action in the last year has helped, or hindered, the fight against inflation.
Andrew Bailey resists any temptation to criticise the Treasury. He points out that the government has many public policy objectives. For example, that can mean allowing water bills to rise to fund the clean-up of the water industry – it’s not for the Bank to oppose that (but it can point out the impact on inflation).
My colleague Phillip Inman looks forward, asking why the Bank doesn’t expect to cut rates more quickly in 2026. The Bank’s scenarios show growth slowing and unempoyment rising in 2026, so why does they show restrictive interest rates?
Andrew Bailey replies that the degree of restrictiveness is easing, and the Bank will continue to assess how restrictive the cost of borrowing is.
Joel Hills of ITV News asks why the Bank doesn’t support strong pay growth.
Andrew Bailey replies that pay growth is an important determinent of inflation, while inflation expectations help to determine wage negotiations.
We have been though a period where pay settlements were well above where our models suggested they would be.
Pay settlements are coming down, he adds, and they will be an “important part of our considerations”.
Phil Aldrick of Bloomberg asks if the Bank would welcome action by Rachel Reeves to slow increases in regulated prices.
Deputy governor Clare Lombardelli says that the Bank thinks around 0.4% of the current 3.8% inflation rate is due to those administered prices.
ShareBailey: I want more evidence that inflation has peaked before voting to cut rates
Helia Ebrahimi of Channel 4 asks how Andrew Bailey can justify leaving interest rates on hold when the Bank believes inflation has peaked.
The governor (who was effectively the swing voter in today’s 5-4 split) replies that he wants to see more evidence that inflation has passed its peak.
Deputy governor Dave Ramsden (who did vote for a cut) provides some support for Bailey from the governor’s left flank, pointing out that inflation is still 3.8% – a long way above the Bank’s 2% target.
ShareBailey: There could be an AI bubble
Asked about the risks of an artificial intelligence bubble in the financial markets, Andrew Bailey says it’s a danger, but also suggests AI could have significant benefits even if valuations are too high.
The BoE governor tells reporters:
“The markets could overprice the returns, but the returns could still be substantial.
So we’ll see, but we are watching the … implications for financial stability.”
“It is, of course, perfectly possible and perfectly consistent that AI could be the next big mover in terms of productivity … My own view personally is, I think, more likely than not it probably is.
“But we’ve still got quite a way to go to actually sort of see that demonstrated. At the same time, we could have a bubble, because obviously the markets are pricing the future stream of returns from this, and that’s uncertain. And so, you know, those two things are not inconsistent.”
There’s no escape from the budget today!
Dharshini David of the BBC asks if the recent increase in national insurance rates, and the minimum wage, made the Bank more hesistant to cut rates.
Andrew Bailey says the Bank wanted to see how businesses responded to these higher costs.
He says some firms have cut back on hiring, while others have raised salaries by less.
Sam Fleming of the Financial Times reminds Andrew Bailey that he has suggested he agrees with current interest rate market pricing* – does that mean 3.5% is the likely terminal rate for the Bank of England – what is the range of views on this on the committee?
(Terminal rate is the point in an easing cycle when a central bank stops cutting interest rates).
Governor Bailey replies that the market curve gives a ‘sensible path’ for interest rates, which isn’t always the case.
On the terminal rate issue, he says the committee are split in two camps – some policymakers do have a prediction, and others (including Bailey) who don’t think there is enough confidence in any estimate of an equilibrium level of rates.
* – in the minutes, Bailey says “Current market pricing is close to the path suggested by a forward-looking Taylor rule, which is a fair description of my position at present.”
Mehreen Khan of The Times asks Bailey about Rachel Reeves’s pre-budget speech on Tuesday, in which the chancellor said she wanted to help the Bank to cut interest rates by fighting inflation. Was the governor not convinced?
Andrew Bailey replies that the Bank is not passing any judgement on what the chancellor said this week, it will wait to hear the budget.
Onto questions….
Ed Conway of Sky News asks what impact the impending budget had on today’s interest rate decision.
Andrew Bailey says the Bank only knows one thing for certain – there’ll be a budget on 26 November.
He adds that the Bank takes its decisions based on known government policy; it won’t speculate about what might be in the budget.
It appears that the Bank of England is keen to hear Rachel Reeves’s budget, in just under three weeks, before deciding it is safe to cut interest rates.
Governor Andrew Bailey says the Bank will receive more data on inflation and cost pressures in the run-up to its next MPC meeting in December.
The bank will also be able to analyse how this year’s budget will influence the economy and the outlook for inflation, he adds.
Worryingly, the governor of the Bank of England then points to signs that the economy is weakening.
Andrew Bailey points out that household consumption growth has been weak, with the Bank only expecting a limited recovery in the near term.
A chart showing UK consumption Photograph: Bank of EnglandShare
Andrew Bailey then presents the press with several charts to show why the Bank of England believes disinflation will continue, and why it expects wage growth to slow.
Photograph: Bank of England Photograph: Bank of England Illustration: Bank of EnglandShareBailey: Two risks will determine future changes to monetary policy
Andrew Bailey confirms that the Bank believes inflation has reached its peak, at 3.8% in the last few months.
He says progress in disinflation has allowed five rate cuts, but cautions that future changes to monetary policy depend on two big factors.
First, inflation is still well above the Bank’s 2% target – and there is a risk that it could be sticky, and that inflation expections could have been pushed higher. That could keep inflation higher for longer.
On the other hand, activity in the economy is below its potential – as shown by falling vacancy numbers and stalling employment growth. If households and businesses are cautious about spending, inflation could fall below target.