The U.K. is set to reach its target level of 2% inflation earlier than expected, Bank of England governor Andrew Bailey has told CNBC.
The central bank left interest rates unchanged at 3.75% on Thursday, in a widely anticipated move, though its nine-member Monetary Policy Committee (MPC) was split 5-4 over the decision.
Speaking with CNBC’s Ritika Gupta following the announcement, Bailey said the MPC expected inflation to reach 2% — the BoE’s target level — by the spring, sooner than anticipated.
“The critical thing now, though, is, of course, that it stays there,” Bailey said.
While key factors such as falling energy inflation are largely baked in, the debate now centers on what the optimum level is to ensure that headline inflation is kept at the target level, he added, highlighting concerns among some MPC members over persistent inflation still lingering from past shocks.
Bailey said this was “the focus of the debate” at Thursday’s meeting that produced the 5-4 split.
“I’m encouraged by what we are seeing, but I do want to see some more evidence that we are going to get the things that we need to see in terms of developments — for instance in services inflation and wage setting — that will take us there sustainably,” he added.
Analysts said the 5-4 vote was closer than expected. Thomas Pugh, chief economist at tax consultant RSM U.K., predicted that the next rate cut would ill come in April, when inflation should be under 3% and wage growth will have slowed further, adding that the dovish tone in the BoE meeting minute hinted at a potential additional cut in the second half of the year.
Thursday’s rates decision came amid renewed uncertainty surrounding the future of Prime Minister Keir Starmer.
Dominic Bunning, head of G10 FX strategy at Nomura, highlighted the increased pressure on Starmer and the attendant risks to the U.K.’s fiscal trajectory, noting how sterling and long-end gilt yields have tended to show a negative correlation during political challenges.
“There are few, if any, potential candidates to replace Starmer, who would be deemed more market friendly, as his bias is firmly towards the centre rather than the left of the party,” Bunning said.
Bunning added that a new prime minister would likely appoint a new finance minister, “creating the risk of negative fiscal sentiment returning.”
U.K. 10 Year Gilts.
Pugh said the biggest risk to gilt yields is now a potential leadership challenge to the prime minister. “The odds of Kier Starmer not being Prime Minister by the end of the year have jumped from around 50% yesterday to over 60% today,” he said in a note.
Bailey declined to comment on specific U.K. political matters, but said the central bank is continuing to carefully monitor the “heightened level” of global uncertainty.
“The world economy has been more robust, frankly, looking back, than we thought it would be a year ago, looking forwards,” he said.
“Now that doesn’t mean that therefore it follows naturally that we will just sort of sail through all of this uncertainty around the world unaffected. I think we’ve been less affected over the last year than we thought would be the case. So we watched this very carefully,” Bailey added.
