‘Tougher policies’ may still be needed | Wilnesh News

Bank of England Governor Andrew Bailey will praise Britain’s progress in curbing inflation in a speech on Friday but also warns that monetary policy may need to remain restrictive longer than expected due to labor market shocks.

Bailey is expected to say in a speech at the summit that headline inflation “fell sharply as energy and food price shocks recede” and that higher interest rates help address so-called second-round effects such as wage growth and price setting. .

Overall UK price growth reached the Bank of England’s 2% target within two months of this year, before rising to 2.2% in July.

Bailey said the risk of persistent inflation was lower than a year ago, adding that he was now paying more attention to a scenario where “persistent inflation is essentially self-correcting as the level of restrictions we have in place today is eased.” “time.

However, he warned that two less “benign” scenarios were still possible, which would require the BoE to “maintain restrictions for longer.”

He is expected to say the scenarios “suggest that structural changes are taking place in product and labor markets, leading to changes on the supply side of the economy that are a lasting legacy of the major shocks we have experienced”.

Earlier, Federal Reserve Chairman Jerome Powell issued his firmest comments yet on Friday, saying interest rates from the world’s largest central bank were coming, saying: “The time has come for policy adjustments.”

Bank of England policymakers have repeatedly expressed concerns about UK wage growth and a tight job market. At the same time, the inflation rate in the UK’s leading industry, the service industry, remains above 5%.

The Bank of England cut interest rates by 25 basis points in August, the first rate cut this cycle. But it left market participants guessing until the last minute whether it would keep them on track amid disagreements among voting members, who pushed for the decision to cut the bottom line in a 5-4 vote.

Data from the London Stock Exchange shows that the market has almost completely priced in another 50 basis points interest rate cut this year.

Bailey will also say on Friday: “In my view, the economic costs of lowering persistent inflation – the costs of lower output and higher unemployment – are likely to be lower than they have been in the past.”

“This is consistent with a stable deflationary process, more consistent with a soft landing than a recession-induced process.”

After experiencing a short and shallow recession in 2023, the British economy has returned to growth this year, with gross domestic product growing by 0.7% and 0.6% respectively in the first and second quarters.