Bank of England Governor Warns of Prolonged Tight Monetary Policy

Bank of England Governor Andrew Bailey is set to acknowledge the progress made in reducing inflation in the U.K. at a speech in Jackson Hole, Wyoming, but he will also highlight the challenges that may require monetary policy to remain restrictive for a longer period than anticipated. Bailey is expected to mention that headline inflation has decreased significantly due to the decline in energy and food prices, and the higher rates have addressed second-round effects such as wage growth and pricing.

While headline price increases in the U.K. recently reached the BOE’s target of 2%, they rose to 2.2% in July. Bailey will note that risks to persistent inflation are lower compared to a year ago. However, he will emphasize the possibility of two less favorable scenarios that could lead to a need for the Bank of England to continue with restrictive measures. These scenarios imply structural changes in product and labor markets, causing lasting effects from major shocks.

BOE policymakers have expressed worries about the pace of wage growth and the tightness in the jobs market in the UK. Inflation in the dominant services sector remains above 5%. The central bank reduced interest rates by 25 basis points in August, the first cut in the current cycle, amid uncertainties among voting members. There is anticipation in the market for another 50 basis points cut later in the year.

Bailey will suggest that the economic costs of curbing persistent inflation could be lower than in the past, indicating a steady disinflation process rather than a recession-induced one. This aligns with a soft landing approach for the economy. The U.K. economy has resumed growth this year following a brief recession in 2023, with GDP expanding by 0.7% and 0.6% in the first two quarters of this year.

Governor Bailey’s speech will acknowledge the achievement in reducing inflation but will also highlight the need for continued caution in monetary policy due to uncertainties in the labor market and structural changes in the economy. The challenges ahead will require the Bank of England to maintain restrictive measures to ensure stable economic growth and control over inflation.