The governor of the Bank of England (BoE) has given no hints regarding the path of interest rates as he reaffirmed the need to bring inflation down.
Andrew Bailey told MPs from the Treasury select committee that it is important for the UK to return to 2%.
“Price stability and inflation being a target is consistent with and supportive of financial stability. So it is important from a financial stability view that obviously we return inflation to target,” Bailey said.
Economists at Deutsche Bank have predicted that UK inflation could drop to the Bank of England’s 2% target this spring.
In a research note, Deutsche Bank (DB) predicts UK CPI inflation will average 2.5% year-on-year in 2024, down from a previous forecast of 2.7%.
The Bank of England has raised interest rates to 15-year highs of 5.25% in an effort to reduce inflation back down to its target of 2%.
Asked about the impact of rising interest rates on the UK economy, the governor pointed out that there has not been a pronounced increase in unemployment since the BoE started raising interest rates.
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Bailey admitted that “of course there are people that are experiencing very difficult times in this country” but argued that overall UK households with mortgages are not as stretched as they were during the global financial crisis 15 years ago.
Mortgage rates have eased from the over 6% peak it hit during Liz Truss’ premiership, currently hovering around 5%.
Bailey told MPs he hoped that the recent fall in the cost of mortgages would continue as investors continue to price in interest rate cuts.
“Obviously we have had a big change in market interest rates in the last few months and so the cost of mortgages is coming down,” he said.
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He added he did not want to comment on the outlook for monetary policy “but let’s just take the market for a moment – obviously that is feeding through into mortgage costs and I hope that is something that continues.”
However, Bailey revealed that the rental market is more stretched, as lower-income households are more likely to rent than own their own home. Rental inflation is running at around 6%, according to BoE data.
The governor of the BoE also told MPs that the UK has not seen a jump in unemployment as a result of higher interest rates.
However, Bailey pointed to the Middle East as top risk in 2024 as the region is still a “very uncertain place”, meaning there is the potential for energy prices to spike.
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Money markets are predicting that the BoE will reduce interest rates five quarter-point cuts this year, down from their 15-year highs of 5.25% to 4%.
Traders are betting there will be four interest rate cuts in 2024 after official figures showed the economy shrank 0.3% in October.
They also predict that Threadneedle Street will begin reducing borrowing costs by May at the latest, having previously forecast it would start by June.
Watch: Bailey: Bank of England still has more to do
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