Bailey suggests that England will not raise rates to the maximum before the crisis

(Bloomberg) — Bank of England Governor Andrew Bailey said interest rates will likely remain below the high levels seen before the financial crisis, his latest sign that the British central bank may be nearing the end of the fastest string of increases in three decades.

He also said that interest rate decisions would not be affected by the crisis hitting the global banking system, and expressed confidence that the UK would weather the storm in the financial markets.

Speaking at the London School of Economics on Monday, Bailey said the underlying condition of the UK economy was that “interest rates will not necessarily have to go all the way back to their all-time highs”.

This optimism came along with his strongest indication yet that the central bank’s two main functions, monetary policy and financial stability, will operate separately. Investors stopped bets on another rate hike, predicting that problems in the banking system would cause the Bank of England to cancel further rate hikes.

Bailey’s comments are based on comments he made after the central bank raised its main interest rate by a quarter point last week to 4.25%, the highest level since 2008, despite a bailout from UK financial group SVB.

Bailey said the UK banking system was “resilient” enough to withstand further shocks and that the authorities had the right tools to support struggling institutions. This means that central bank regulators can fix problems as they occur, while the Monetary Policy Committee will work to reduce inflation from double digits to a target of 2%.

“We have a strong macroprudential policy regime in this country,” Bailey said. “Since the Fiscal Policy Committee is tasked with ensuring financial stability, the Monetary Policy Committee can focus on its job of bringing inflation back to target.”

He said, “The key to the MPC’s work is that it has the necessary tools to do its job, and that those tools are not constrained by other factors.”

In response to questions, Bailey said, “In fact, there is no tension between the Monetary Policy Committee and the Fiscal Policy Committee.”

On the future path of interest rates, Bailey said he was now more cautious about giving guidance on the direction of borrowing costs after the magnitude of the shocks to the UK.

Before the pandemic, central banks said the long-term neutral interest rate had fallen permanently under a major change to the post-financial crisis system. Economists had assumed that interest rates would therefore remain low compared to pre-financial crisis levels. However, the recent surge in inflation has challenged those assumptions as central banks are aggressively dealing with the highest rate of inflation in decades.

On the economy, Bailey repeated almost verbatim comments he made last week in interviews with the BBC after the interest rate decision. He said the central bank would decide interest rates based on emerging evidence, and that additional increases may be necessary if there are signs that inflation will continue for longer than expected.

Bailey welcomed the government’s efforts to get more workers back into the workforce, which addresses one of the main things that drive up wages and prices.

He said the economy’s growth has been slightly stronger than the central bank expected, but wages are rising slightly less than expected.

Original note: Bailey suggests the Bank of England will not raise rates to their pre-crisis highs (3)

– In collaboration with Lucy White.

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