(Bloomberg) -- Bank of England Governor Andrew Bailey hit back against criticism that he’s too gloomy, insisting that he is a “realist” about the prospects for the UK economy.
Bailey said in an interview with Staffordshire’s Daily Focus newspaper that he is not an “ultra-pessimist” on growth after recent comments sparked a backlash from right-wing newspapers and a Conservative member of Parliament.
The Governor was accused of “talking down the economy” by the Express newspaper and former Chancellor of the Exchequer Kwasi Kwarteng after he said on Monday that the UK’s growth outlook is the worst he has seen in his career.
“I’ve been written up this week as being an ultra-pessimist, but I don’t see it that way,” Bailey said in an interview with the Daily Focus published Wednesday. “I see it as a realist view. We start with a realist view, but we are very, very, committed on behalf of the people of this country to get on with tackling the job.”
In an interview with the Newcastle Chronicle on Monday, Bailey had referred to the UK’s subdued potential growth rate published by the BOE back in February. He has previously said that the UK was facing the worst growth outlook in his career.
However, the remarks triggered criticism from the Express newspaper, which said in a front page headline reading, “Time for bank chief who talks Britian up!”
Kwarteng told GB News that the governor “shouldn’t really be essentially talking down the British economy, and I think his remarks this week were along that line. There’s an issue with the Bank not having political accountability, and it does have huge amounts of power.”
The debate underscores the tensions facing Bailey as he balances the need to fight against inflation against a desire from the government to add some zip to the economy before the next election.
The BOE’s forecasts are more downbeat than those from the Office for Budget Responsibility, the UK’s fiscal watchdog. Bailey has emphasized fighting inflation, which remains about triple the BOE’s 2% target. And that’s led him to warn that interest rates will remain elevated for a prolonged period to ensure that demand in the economy stops fueling price pressures.
The central bank has embedded in its forecasts a judgment that the economy’s supply capacity is poor, which implies that even lackluster household spending and demand growth can prove inflationary, said Ian Mulheirn, an associate at the Resolution Foundation and former chief economist at the Tony Blair Institute for Global Change.
Had the BOE been more optimistic, it would be under pressure from markets to cut rates now by a percentage point or more, according to Mulheirn. A weak forecast for trend GDP helps the BOE “sound tough on inflation” so it “retrofits a pessimistic view,” he said.
Bailey used the Daily Focus interview to continue to push back against expectations of an interest rate cut in the coming months. Following a trip to Stoke-On-Trent, the governor told the newspaper that officials will “do what it takes” to get inflation to the 2% target, but that progress from the current 4.6% could be slow.
“We’re not in a place now where we can discuss cutting interest rates – that is not happening,” Bailey said, adding that he expects inflation to be a little below 4% by the end of the first quarter of 2024. “We need to see how the final part of the journey down to 2% inflation plays out. We have not seen enough of that journey yet to be confident.”
Markets have fully priced in a rate cut by August next year, though this has slipped back from June as members of the BOE’s nine-member Monetary Policy Committee have raised concerns in recent weeks around stubbornly high services inflation in the UK.
Bailey confirmed that the BOE was seeing some signs of weakening in economic activity and that economic activity was likely to remain “subdued” for the next year.
--With assistance from Gabriela Mello and Philip Aldrick.
(Updates with comment from the report.)
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