(Bloomberg) -- Bank of England Governor Andrew Bailey said disinflation in the UK is happening faster than officials had anticipated, the latest hint that the central bank will continue cutting interest rates next month.
Bailey said during an event on Wednesday in Washington that inflation was lower than he had expected a year ago, highlighting a “good story” on second-round effects that threatened to keep price pressures elevated. “Disinflation is happening I think faster than we expected it to, but we have still genuine question marks about whether there have been some structural changes in the economy,” Bailey said during the Institute of International Finance event.
The comments were the latest from Bailey to suggest that the BOE will continue to ease policy at its next meeting on Nov. 7 after skipping a cut in September. While the BOE signaled a cautious approach to easing policy at its previous meeting, Bailey recently hinted that it could be “a bit more aggressive” with rate cuts if the good news on inflation continued.
His remarks on Wednesday may further entrench bets on the BOE shifting to a quicker rate cutting cycle in the coming months. Traders currently expect a cut next month and put a 60% chance of another quarter-point reduction in December.
“If you’d ask me what inflation was going to be now, it would have been a bit higher than it is today,” he said. Hopes of a more rapid easing were lifted last week by inflation slipping below the BOE’s 2% target for the first time in more than three years.
However, he said officials were still uncertain over whether there has been structural changes in the UK economy that would keep price pressures high, including from the labor market. Any shift toward a faster cutting cycle may face resistance from some policymakers, who still have lingering concerns over services prices and the tightness of the jobs market. Rate-setter Megan Greene, for one, said on Tuesday that she still favored a gradual approach to easing policy.
Bailey said that services inflation — which is still elevated at just under 5% — has to “come further down.” He also sounded cautious over data from the labor market, warning that was “probably loosening,” but still tight. “We’ve got a very unbalanced mix of inflation components and services inflation remains higher than is consistent with the target,” he added.
Meanwhile, Bailey said that officials needed to tackle a lack of investment in the UK economy by its pension industry. While he cautioned against forcing pension funds to invest in the UK, Bailey lamented a “fragmented” industry. The comments come as the new Labour government tries to boost investment by pension funds, as part of its efforts to boost Britain’s anemic growth rates.
“These are markets that have to operate, but you can’t get away from the question,” he said. “I think we do have to address the fact that the UK has relatively weak capital deepening, relatively weak investment and it has a pension industry that is quite fragmented and isn’t investing in the UK real economy.”
When asked about Chancellor of the Exchequer Rachel Reeves’ first budget on Oct. 30, Bailey noted that the impact that the UK’s low growth rate was having on both monetary policy and public services. Economists have warned that Reeves’ budget plans next week may slow the pace of the BOE’s rate cuts if she borrows tens of billions of pounds more to invest, potentially stoking inflationary pressures.
“The whole question of growth is critical,” he said. “It has an effect in terms of the speed limit for monetary policy, it has a big effect for fiscal policy, it has a big effect in other areas of public policy if you’re financing the health service.”
--With assistance from Laura Noonan.
(Updates with pension comments in eighth paragraph.)
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