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Bank's head cautions against assuming March rate rise
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Markets had priced in at least a 25 bp hike
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Bailey says economy evolving broadly as forecast in Feb
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BoE's MPC split on need for further hikes
(Updates market reaction, adds detail from speech)
By David Milliken and William Schomberg
LONDON, March 1 (Reuters) - Bank of England Governor
Andrew Bailey said on Wednesday it was possible the central bank
had already come to the end of its rate-rising cycle, leading
financial markets question whether a rate rise this month is as
clear-cut as they thought.
The BoE raised interest rates to 4% last month but
signalled it was close to ending a run of increases that began
in December 2021, as some of the inflation pressures in
Britain's economy have showed signs of easing.
"At this stage, I would caution against suggesting either
that we are done with increasing Bank Rate, or that we will
inevitably need to do more," Bailey said in the text of a speech
at a closed-doors event organised by public relations firm
Brunswick Group.
"Some further increase in Bank Rate may turn out to be
appropriate, but nothing is decided."
Following Bailey's remarks, financial markets trimmed bets on the likelihood of a quarter-point rate rise on March 23 after the BoE's next Monetary Policy Committee meeting. They now see a 10% chance that the BoE will keep rates on hold. Before Bailey spoke, markets had fully priced in a quarter point rise, and saw a small change of an increase to 4.5%.
However, markets still see a roughly two thirds chance that rates will peak at 4.75% in the second half of this year. Sterling weakened against the euro and two-year British government bond yields dropped by around 10 basis points from their level before Bailey's speech. His words showed that the bank's rate-setting committee "is placing more emphasis on the substantial tightening already delivered and would like to call time on its hiking cycle as soon as it feasibly can," said Samuel Tombs, chief UK economist at Pantheon Macroeconomics.
Tombs expects rates to stay on hold this month.
Bailey said the economy had developed largely as expected since the BoE last raised rates on Feb. 2. "Inflation has been slightly weaker, and activity and wages slightly stronger, though I would emphasise 'slightly' in both cases," he said.
SOFTER LANGUAGE Bailey also highlighted how the central bank had shifted its language in February. In its policy statement, the BoE no longer talked about responding "forcefully" to evidence of more persistent inflation pressures. However, he also said it was important not to repeat the mistakes that central banks made in the 1970s, when oil price shocks and tight labour markets led to spiralling prices.
"If we do too little with interest rates now, we will only have to do more later on. The experience of the 1970s taught us that important lesson," he said.
"But equally ... we have to monitor carefully how the
tightening we have already done is working its way through the
economy to the prices faced by consumers."
One member of the BoE's Monetary Policy Committee, Catherine Mann, said last week that it was too soon to say the risks posed by last year's surge in inflation had eased, and that the central bank should continue to raise borrowing costs. But two MPC members - Swati Dhingra and Silvana Tenreyro - voted in February to pause the rate hikes. J.P. Morgan economist Allan Monks said he expected the BoE would have to raise interest rates further, due to upside surprises to business surveys, rapid pay growth and likely fiscal loosening in finance minister Jeremy Hunt's March budget. "As inflation continues to surprise on the upside in other countries for January and February, it suggests to us a deeper underlying problem that is not going away despite the fall in energy prices," he said.
British consumer price inflation hit a 41-year high of 11.1% in October and remains in double digits. The central bank forecasts it will fall sharply in the second half of this year. Industry data published on Tuesday showed British grocery inflation hit 17.1% in the four weeks to Feb. 19, a record high. (Additional reporting by Andy Bruce; editing by John Stonestreet)
Reuters Messaging: william.schomberg.reuters.com@reuters.net))