Bank of England Governor open to rate cuts amid recession recovery signs

BoE rate cuts: Bank of England (BoE) Governor Andrew Bailey expressed comfort with investors' expectations of interest rate cuts this year, citing indications of Britain's economy rebounding after slipping into recession in late 2023.

Investors increased bets on a first BoE rate cut in June following Bailey's remarks, with a quarter-point reduction fully priced in for August.

Despite raising the bank rate to 5.25 per cent in August 2023, the BoE has maintained it there, citing ongoing inflation risks. Bailey emphasised that while he is open to rate cuts, the timing and extent remain uncertain.

Sterling weakened against the euro as Bailey spoke, and government bond yields declined.

Inflation may dip

Bailey reiterated that the BoE does not require inflation to fall below its 2 per cent target before considering rate cuts, acknowledging that inflation may temporarily dip below target between April and June.

While the economy contracted by 0.3 per cent in Q4, Bailey highlighted positive signs, particularly in employment and household incomes, indicating a potential economic upturn.

Deputy Governor Ben Broadbent suggested rate cuts were possible but contingent on economic developments, while external MPC members highlighted the risks of tight monetary policy exacerbating economic challenges.

Broadbent anticipated a moderation in wage growth, a key factor for domestic inflation, in the coming months as inflation eases.

Despite current pressures, Bailey and his colleagues remain cautiously optimistic about the economy's trajectory, emphasising the need for data-driven decisions regarding interest rates.

(With Reuters inputs)