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Bank of England could cut interest rates before the 2% inflation target

by Amy Johnson LLB Finance Reporter
20th Feb 24 12:07 pm

The Bank of England has suggested inflation does not need to hit 2% before they start cutting interest rates.

The Bank’s governor Andrew Bailey said that the recession is “very weak” and the cumulative fall in GDP in the third and fourth quarter of 2023 is the “weakest by a long way.”

Bailey told the Treasury Select Committee, “We have a very precise definition of a recession in this country as two successive quarters of negative GDP growth.

“The two successive quarters… last year, I think, cumulatively add up to minus 0.5% on GDP.

“If you look at recessions going back to the 1970s, this is the weakest by a long way because the range, I think… for those two quarters for all the previous recessions was something like 2.5% to 22% in terms of negative growth, so minus 0.5% is a very weak recession.”

The Bank of England governor said that the Monetary Policy Committee (MPC) could cut interest rates even before inflation hits the 2% target.

Bailey said, “We’ve seen, I think, encouraging signs on them. So, services inflation is still above 6%, there are some signs of it coming down now.

“I think some signs that pay is now adjusting down towards the lower headline inflation, which is what I’d expect to see.

“The quantity side of the labour market remains tight, there’s no question about that. But it’s the progress of those three things.

“We don’t need inflation to come back to target before we cut interest rates, I must be very clear on that, that’s not necessary.

“We’ll be looking for sustained progress on those things to reach that judgment about how long this period of restrictive policy needs to be.”

Swati Dhingra, a fellow member of the MPC, said, “Despite the disinflation at play, and despite the fact that there has been some real wage recovery, we’re still seeing consumption very weak and very different from some of the other advanced economies where there has been a bounce back from the pre-pandemic levels.

“Here, we aren’t seeing that, even after January’s retail sales, unfortunately, (retail sales are) about 2.1% lower.

“I think that suggests to me that the downside risks at this point are substantial and, therefore, if we keep monetary policy tight for longer, that would weigh even further on that sort of real relativity.”

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