(Bloomberg) -- Bank of England Governor Andrew Bailey said interest rates were unlikely to fall back to ultra-low levels in the UK without another bout of economic crises on the scale of the financial crisis and the pandemic.
Bailey said in an interview with the regional Kent Messenger newspaper on Tuesday that “very big shocks” would be necessary to push central banks to bring borrowing costs back to near zero. He reiterated his view that easing would continue “gradually” after the BOE’s Monetary Policy Committee decided last week to leave rates unchanged at 5.0%.
Bailey’s remarks suggest that the central bank believes that the neutral interest rate — where policy is neither stimulating or squeezing the economy — is significantly higher than the historic low levels seen in recent years. BOE policymakers have been wary about signaling to investors where they expect rates to settle, despite kicking off their own cutting cycle in August with a quarter-point cut.
While the BOE’s benchmark rate is already near its historical average over the past century, the central bank had lowered borrowing costs to 0.5% after the financial crisis and 0.1% after Covid struck. That last move came just days into the start of Bailey’s eight-year term as governor.
“What caused interest rates to go that way it was, amongst other things, two very big shocks to the economy,” Bailey told the newspaper. “It all started with the financial crisis then Covid was another big shock.”
Bailey didn’t signal where he expected rates to settle, adding that he couldn’t predict that “with any great accuracy.”
The BOE is now unwinding its most aggressive policy tightening in generations after inflation cooled to close to its 2% target. Bailey’s comments underscored the BOE’s cautious stance on lowering borrowing costs even as policymakers in the US signal a more aggressive easing.
The BOE governor largely stuck to his patient messaging on the speed of rate cuts. The MPC gave a cautious view on the pace of easing last week, prompting traders to rein in bets on a more aggressive action.
“Inflation has come down a long way,” Bailey said. “We still have to get it sustainably at the target and we have quite an unbalanced mix of components of inflation at the moment. But I’m very encouraged that the path is downwards therefore I do think the path for interest rates will be downwards, gradually.”
Bailey also repeated concerns over the impact of Brexit on the UK’s trade links, where are being highlighted anew by expanded cross-border checks. “There will be some short-term painful effect on trade,” he said, noting that small businesses would be most impacted by trade being redirected.
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