Bank of England governor Andrew Bailey has said he is “optimistic” inflation will come down to normal levels, but warned that the cost of borrowing will stay high for some time.
Mr Bailey said that the Bank’s forecasts, released last week, suggest that by the end of 2025, inflation will have returned to the target of two percent.
Speaking at an event in Dublin, the governor reiterated that it is “too early” to talk about cutting interest rates.
Mr Bailey said: “I think it is common when you look at the Fed minutes, you look at ECB, you look at us, it’s really too early to be talking about cutting rates.
“The market of course will reach a view, it has to reach a view on the future path of interest rates.
“But we are very clear. We’re not talking about that. What we’re saying is that policy is going to have to be restrictive for an extended period.”
The Bank forecast suggests they will be back at the target in around the two-year horizon. Although optimistic, Mr Bailey warns the Bank will have to continue doing the work to make it happen.
Speaking at a conference hosted by the Central Bank of Ireland, Mr Bailey said that Brexit had reduced the openness of the British economy.
He continued: “As a public official, I take no position on Brexit per se. That was a decision for the people of the UK. It has led to a reduction in the openness of the UK economy, though over time new trading relationships around the world should, and I expect will, be established. Of course, that requires a commitment to openness and free trade.”
Mr Bailey also said that artificial intelligence (AI) is unlikely to be useful for the medium-term forecasts that the Bank does when setting monetary policy.
He concluded: “I think the caution I would have from what I’ve seen so far is that machine learning focuses, if you like, on using vast amounts of data to predict one step ahead. That can be useful, don’t get me wrong.
“It’s not, I think, so useful in terms of the more medium-term forecasting we have to do for monetary policy where you really need a structural model.”
Last Thursday, the Bank of England held interest rates at 5.25% for a second meeting, at a 15-year high of 5.25 percent, and signalled borrowing costs would stay high for an extended period as it tackles stubborn inflationary pressures.
It was the second time in a row it has left the base rate unchanged following 14 consecutive rises in nearly two years.
Inflation has been easing in recent months, with Consumer Prices Index (CPI) inflation falling from a peak of 11.1 per cent in October 2022.
However, on Monday, the Bank’s chief economist Huw Pill said financial market expectations of a rate cut in August 2024 “doesn’t seem totally unreasonable, at least to me”.
