Andrew Bailey thinks that next month, inflation will decrease significantly, even though recent data shows prices went up faster than expected in March.
As the Governor of the Bank of England, Bailey believes inflation will likely drop to 2% in the coming months. This drop is expected because household bills, like energy, are becoming cheaper due to a decrease in the energy price cap.
Official numbers revealed that inflation slowed down to 3.2% in March from 3.4% in February, though it was a bit higher than what economists predicted.
Bailey wants to reassure people that the Bank of England won’t keep interest rates high for too long because of worries about prices going up persistently.
During a talk in Washington organized by the Institute of International Finance, he mentioned, “We’re pretty much where we expected to be in February.”
This means that the Bank’s expectation of inflation hitting its 2% goal by the second quarter of the year is still likely to happen.
Bailey also said, “What’s happening now is that inflation numbers are going down. I anticipate that next month’s data will show a significant drop because of how energy pricing works for households in the UK.”
Bailey mentioned that policymakers will keep evaluating when to lower rates every time they have a meeting, and the next one is in just three weeks.
He emphasized that there are still significant risks, like instability in the Middle East. The Bank also thinks that inflation will go up again in the second half of the year.
However, Bailey noted, “The situation in the UK has changed quite a bit. We’re going through a noticeable period of disinflation, which is a relief.”
Now, it’s expected that the Bank of England will cut interest rates twice this year, bringing borrowing costs to 4.75% by the end of 2024. Initially, traders thought there would be five rate cuts.
According to money markets, policymakers might wait until August before starting to lower borrowing costs.
Grant Fitzner, who is the chief economist at the ONS, explained, “Once again, food prices were the main reason for the fall, with prices rising less than they did a year ago. Similar to last month, we saw a partial offset from rising fuel prices.”
The increase in fuel prices is likely to keep going up due to growing tensions in the Middle East, especially after Iran recently attacked Israel.
Yael Selfin from KPMG cautioned that even though inflation might soon go back to the Bank’s target of 2%, there are still significant risks.
Selfin explained, “The general inflation outlook seems mostly positive, but there are a few risks that could cause problems. Oil prices have gone up in the past month, leading to higher prices at gas stations for consumers. Also, the increase in the National Living Wage could contribute to continued high inflation in services.”
Chancellor Jeremy Hunt stated that the recent drop in inflation shows that “the plan is working.”
Hunt mentioned, “Inflation is decreasing faster than expected, dropping from over 11% to 3.2%, the lowest level in almost two and a half years, which helps people manage their money better.”
Separate data confirmed that inflation in the eurozone fell to 2.4% in the year up to March, down from 2.6% the previous month. This sets the stage for the European Central Bank to begin lowering rates in the coming months.
