Bank of England deputy governor plays down market volatility, supports further interest rate cuts.

Deputy Governor of the Bank of England, Sarah Breeden, played down the spike in UK bond yields this week and expressed willingness to further cut interest rates. Sarah Breeden said on Thursday after giving a speech that the sharp rise in borrowing costs and the fall in the pound were the "orderly" result of market fluctuations, reflecting global factors affecting US and European bonds. Sarah Breeden said, "This is unsurprising as markets respond to news about the fiscal outlook." Her remarks indicate that the Bank of England is unwilling to intervene in the market, as it did in 2022 when UK bonds and the pound plummeted after then-Prime Minister Theresa May proposed a "mini budget." She added, "We will continue to monitor this area." Expectations for monetary easing from the Bank of England have decreased this week, but Sarah Breeden said there are "preliminary" signs that economic activity is slowing down and predicted that hot wage growth will cool down. She stated in her speech, "Recent evidence further supports reasons to unwind policy constraints. I expect gradual unwinding over time." These comments suggest that Sarah Breeden is willing to support another rate cut at the Bank of England's February policy meeting, despite concerns about recent financial market turmoil and ongoing price pressures in the labor market. It is worth noting that Sarah Breeden, responsible for financial stability, rarely directly addresses inflation and monetary policy in her speeches. Bank of England Monetary Policy Committee member Catherine Mann also pointed out that a weak labor market is a long-term problem in the UK. She noted that working-age illnesses and early retirements among the 50 to 65 age group have hindered the UK's growth potential. She said, "There is little potential power on the supply side of the economy, which is a factor I must consider when judging appropriate policy settings." Supply shortages make the economy more susceptible to inflation. Catherine Mann is one of the more hawkish members of the Monetary Policy Committee, voting to speed up rate hikes during inflation shocks, then opposing rate cuts in August and November last year. She voted along with the majority of committee members at last month's policy meeting to keep rates unchanged at 4.75%, but it is believed that this official stated they are nearing a "hawkish stance" on rates. Additionally, Sarah Breeden downplayed the threat posed by data released before Christmas, showing the first rise in UK wage growth in over a year. Sarah Breeden emphasized that the UK economy is expected to stagnate in the second half of 2024. She said, "I expect past shocks to continue fading as lower overall inflation gradually translates into lower wage growth. There are now some initial signs that economic activity is starting to weaken, although we expect it to pick up again." Sarah Breeden also judged that employers may pass on the 26 billion (approximately $32 billion) wage tax increase imposed by the Labour government by reducing wage growth, rather than through price increases, declining profit margins, or unemployment.