Bets by investors on interest rate cuts in 2024 were not unreasonable, Bank of England governor Andrew Bailey said on Tuesday (Feb 20), while also pointing to signs Britain’s economy was picking up after falling into recession at the end of last year.

Investors slightly raised their bets for a first BOE rate cut in June as Bailey and fellow policymakers spoke. A quarter-point reduction was fully priced in only for August.

The BOE raised Bank Rate to 5.25 per cent, its highest since 2008, as it grappled with surging inflation and has kept it there since August despite a sharp slowdown in price growth, saying it is not yet convinced the inflation risk is fully over.

“The market is essentially embodying in the curve that we will reduce interest rates during the course of this year,” Bailey told lawmakers on the Treasury Select Committee.

“We do not endorse the market curve. We are not making a prediction of when or by how much (we will cut rates). But... it’s not unreasonable for the market to think that,” he said.

Bailey repeated that the BOE would not need inflation to fall to its 2 per cent target – something it expects to happen between April and June – in order to cut rates.

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Sterling slipped to its lowest level against the euro in around a month as he spoke.

Bailey also focused on signs – including robust employment figures – that Britain’s economy was stronger than might be suggested by data last week that showed it fell into a shallow recession in the second half of 2023.

While a 0.3 per cent contraction in the fourth quarter was worse than the BOE had expected, Bailey said there were reasons for optimism.

“We think the economy is already actually showing distinct signs of an upturn,” Bailey said.

“There was a lot of emphasis again on this point about the recession, and not as much emphasis on ... the fact that there is a strong story, particularly on the labour market, actually also on household incomes,” he said.

British government bond yields fell as Bailey and his colleagues spoke.

Deputy governor Ben Broadbent said it was possible the BOE would cut rates this year, although that would depend on how the economy evolves.

Swati Dhingra, an external member of the Monetary Policy Committee, described substantial risks to Britain’s economy that tight monetary policy would only exacerbate.

Broadbent and Megan Greene, another external MPC member, said they were reasonably sure that wage growth – a key gauge of domestic inflation pressure – would edge lower in the coming months as inflation cools. REUTERS