(Bloomberg) -- Bank of England policymakers warned that it will take some time to ensure inflation falls back to 2%, pushing back against market expectations for interest-rate cuts next year.

Four of the central bank’s nine-member Monetary Policy Committee — including Governor Andrew Bailey — told Parliament that investors are focusing too much a sharp drop in the inflation rate to 4.6%.

“I really think the market is putting too much weight on the current data releases and the fact that we’ve seen inflation come down quite rapidly,” Bailey said. “We are concerned about the persistence of inflation on the rest of the journey.”

The comments to the Treasury Committee jar with the focus investors have placed on Britain’s weakening economy, which is at risk of falling into a recession in the months leading up to the next election. Traders have fully priced in three rate cuts by early 2025, including at least one by June. 

While the BOE predicts a long period of stagnation, with a 50/50 chance of a recession, it maintains that inflation remains the primary concern. Lawmakers have started to agitate for rate cuts. 

Three BOE policy makers warned that the BOE may have to drive services inflation below pre-financial crisis levels, since it seemed unlikely that the sharp drop in goods prices in the past decades will be repeated. 

Bailey said he’s particularly concerned about the stickiness of inflation in the services sector. Over the last 20 years, he said, goods prices and services prices had hung in an equilibrium which kept inflation at target. To get back to that balance, “services inflation is going to have to come down quite a bit from where it is today,” Bailey said.

Catherine Mann, an external member of the MPC, went a step further. Goods inflation “has to go from around 5% ... to negative 1% deflation.” She added that “services would have to go from 6%-plus down to 3%, if the configuration between goods and services were to return to where it was in the last 20 years. That’s a long way for both to go.”

Her colleague Jonathan Haskel said that in the pre-financial crisis era, world goods deflation from globalization allowed more room for price inflation in the services sector. “Which we probably won’t have now,” he said, referencing worries around higher energy prices and supply-chain frictions introduced by growing geopolitical tensions. 

One of the MPC members said investors have taken the wrong message from Huw Pill, the BOE chief economist who seemed to suggest in an appearance earlier this month that market bets for rate cuts in 2024 were not “totally unreasonable.” That helped firm up expectations for a sharp reduction in borrowing costs.

Haskel said he thought Pill had been “misquoted,” and that the chief economist had in fact just been describing the market view if nothing else happened instead of endorsing the view that rates will fall.

Mann said she’s in favor of pushing up rates further because “actions speak louder than words, especially when you deal with the markets.” At the moment, she said, holding rates at their current level risked inflation becoming “stuck” above the 2% target.

Hike Warning

“While I acknowledge that the monetary policy stance has started becoming restrictive, it is so only recently and not by so much,” Mann wrote in an annual report to lawmakers published by the Treasury Committee. She added that she continued “to see upside potential for sales and employment.”

Bailey, who has voted along with the majority of the MPC to keep rates steady at 5.25% for the last two meetings, said he was “basically in the same place” as Mann, although they differed in their strategy to tackle inflation “at the margin.”

BOE Deputy Governor Dave Ramsden said he “would not rule out” further rate hikes and “a restrictive policy stance is likely to be warranted for an extended period of time.”

He and Mann both expressed concern about the low potential for growth in the economy. Mann said  “anemic is how I would characterize growth prospects.” 

Ramsden took a bleaker view, noting business investment in the UK is currently only 6% higher than it was in the second quarter of 2016, at the time of the Brexit referendum. 

“That’s less than 1% (growth) a year,” Ramsden said. “Over that time US business investment has gone up by over 25%.”

Read more: BOE Deputy Governor Says Market Rates Too Low to Curb Inflation

--With assistance from Philip Aldrick, Irina Anghel, Andrew Atkinson and Eamon Akil Farhat.

(Updates with further comment from the third paragraph.)

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