Interest rates: ‘Considerably more doubt’ over future cuts, Bank of England governor warns

There is “considerably more doubt” over when future interest rate cuts can take place, the governor of the Bank of England has said.

Andrew Bailey told a committee of MPs that the risks around inflation had gone up and he was “more concerned” about weakness in the labour market.

Bank staff projections expect the main consumer prices index measure of inflation to rise to 4% this year – double the 2% target rate – from its current level of 3.8%. Food prices are proving the main driver currently, with part of the increases blamed on government tax rises on employers.

On the prospects for further interest rate reductions this year, Mr Bailey said: “There is now considerably more doubt about when and exactly how quickly we can make those further steps.”

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Interest rates are elevated to help ease the pace of price growth and cut, when able, to help maintain inflation at the 2% target level.

The governor was speaking after the Bank’s split vote last month that resulted in a quarter point reduction for Bank rate to 4%.

At that time, the governor said that while he still believed that the future path for borrowing costs was still downwards gradually over time, financial markets had since understood that the outlook for the pace of cuts was more murky.

“That’s the message I wanted to get across”, he told the Treasury select committee.

“Now, I think actually, judging by what’s happened, certainly to market pricing since then, I think that message has been understood.”

A further quarter point cut to 3.75% is no longer fully priced in for this year, according to LSEG data on market expectations.

He was speaking as financial markets continued to see a widespread sell-off of long-dated bonds, largely over fears of rising government debt levels in many western economies including the US and UK.

The activity has taken the yield – the effective interest rate demanded by investors – in 30-year gilts to a 27-year high this week. Other shorter dated bonds have also risen sharply.

But Mr Bailey urged less of an emphasis on the long-term gilts, as headlines point out that any increase in the cost of servicing government debt is a headache chancellor Rachel Reeves can well do without as she battles to balance the books.

He told the MPs: “It’s important not to … over focus on the 30-year bond rate. Of course, it’s a number that gets quoted a lot, it’s quite a high number. It is actually not a number that is being used for funding at all at the moment.”

Mr Bailey also waded into the continuing row across the Atlantic that sees the independence of the US central bank, the Federal Reserve, threatened by Donald Trump and his quest for interest rate cuts.

He has moved to fire a Fed governor over alleged mortgage fraud and make a new appointment but Lisa Cook, who was appointed to the board by Joe Biden, is fighting his bid to oust her in the courts.

“This is a very serious situation”, Mr Bailey said.

“I am very concerned. The Federal Reserve… has built up a very strong reputation for independence and for its decision making,”, adding that trading central bank independence against other government decisions would be a “very dangerous road to go down”.