Bank of England Governor Baily: Interest rates unlikely to rise above low levels unless significant shocks occur

Bank of England Governor Andrew Bailey said that unless there is another financial crisis or a similar economic shock of the scale of a pandemic, interest rates in the UK are unlikely to fall back to ultra-low levels. He emphasized that it would take a "very big shock" for the bank to lower borrowing costs to near-zero levels. Following the Bank of England Monetary Policy Committee's decision last week to keep rates unchanged at 5.0%, Bailey reiterated his view on gradually implementing loose policy. Bailey's comments suggest that the Bank of England believes the neutral rate of interest (neither stimulating nor restricing the economy) is significantly higher than the recent historical lows. Despite the Bank of England starting its own rate-cutting cycle in August, policymakers have been cautious in signaling to investors where they expect rates to stabilize. The Bank of England's benchmark rate is already close to the historical average level of the past century, but it dropped to 0.5% after the financial crisis and further dropped to 0.1% after the outbreak of the coronavirus pandemic. Bailey pointed out that these rate changes were caused by two major economic shocks. Currently, the Bank of England is gradually unwinding its aggressive policy tightening measures to address inflation rates nearing the target of 2%. Bailey's comments reflect the Bank of England's cautious stance on lowering borrowing costs, in contrast to the more aggressive easing signals from US policymakers. Bailey stated, "Inflation rates have fallen significantly. Our goal is to ensure its sustainable level reaches the 2% target, even though the current inflation composition remains uneven. However, I am encouraged by the downward trend in inflation rates, which makes me believe that rates will gradually decrease." Bailey also reiterated concerns about the impact of Brexit on UK trade relationships, noting that trade will be affected by some short-term pain, especially for small businesses. Last week, the Bank of England Monetary Policy Committee voted 8-1 to keep rates unchanged at 5%, contrasting sharply with the Fed's 50 basis point rate cut. This decision was in line with market expectations, pushing the GBP/USD exchange rate to its highest level in over two years. The Bank of England warned that it will not rush to loosen monetary policy as further signs of easing inflation pressures are needed. Bailey stated in a release, "Over time, we should be able to gradually lower rates." He emphasized that this path will depend on whether price pressures continue to ease. Following the rate decision, the currency market reduced bets on the extent of rate cuts by the Bank of England this year, expecting a 41-point cut by December, down from the previous expectation of a 50-point cut. The GBP/USD exchange rate exceeded 1.33 for the first time since March 2022.