BOE’s Bailey Hints Rates May Be Higher for Longer Than Expected

Lucy White, Bloomberg News

Andrew Bailey, governor of the Bank of England (BOE), speaks at the British Chambers of Commerce (BCC) Global Annual Conference 2023 in London, UK, on Wednesday, May 17, 2023. Bailey said he was “unwavering” in his commitment to the UK’s 2% inflation target, as he warned that higher food prices and a tight labor market could cause the cost-of-living crunch to persist. , Bloomberg

(Bloomberg) -- Bank of England Governor Andrew Bailey hinted that interest rates could remain at peak levels for longer than traders currently expect.

“I’ve always been interested that the market thinks the peak will be short-lived in a world where we’re dealing with more persistent inflation,” he said on a panel Wednesday afternoon.

Speaking at the European Central Bank Forum on Central Banking in Sintra, Portugal, he noted that several more rate hikes are being priced in following the most aggressive tightening cycle in three decades.

Money markets are currently betting that the benchmark rate will peak below 6.25% by February, though they are placing one-in-five odds on a further increase to 6.5% earlier. It is then expected to remain on hold for at least six months, with the first quarter-point cut priced in by September next year.

“My response to that would be, ‘We’ll see,’” Bailey said, noting that the BOE’s rate decisions were “essentially evidence-driven.”

Bailey said inflation was more persistent than expected due to a tight labor market fueled by higher wage-setting, and a more resilient economy.

But he denied that labor market tightness was being driven by Brexit, instead attributing it to “the response to Covid.”

Bailey added that the BOE was also looking at how artificial intelligence would affect the economy, and how it could use the technology in its own analytical and operational functions.