Bank of England Governor, Andrew Bailey, expressed his expectation for a significant decrease in inflation by the end of 2023 in a meeting with MPs on Wednesday. He indicated that the cycle of interest rate increases, which has seen 14 consecutive hikes since December 2021, may soon be at an end due to falling energy prices and a weakening labor market.
The governor's comments impacted currency traders as sterling fell below $1.25 for the first time in three months. Despite this, financial markets continue to expect the Monetary Policy Committee (MPC) to increase interest rates by 0.25 percentage points to 5.5% when it meets on September 21st.
Bailey noted that inflation has already decreased from its peak of 11.1% in October 2021 to 6.8% in July 2023, but remains high. He highlighted that various economic indicators signal a further decrease in inflation this year, with inflation expectations among consumers and businesses having moderated.
However, mixed signals about the path of inflation were acknowledged by Bank of England deputy governor, Sir Jon Cunliffe. He noted strong pay growth despite the drop in inflation and an unexpected month-on-month increase in service sector prices.
Despite these concerns, Bailey maintains his belief that the fall in inflation will be quite marked by year's end. He anticipates a temporary rise in inflation due to an increase in oil prices last month but expects this to be a short-lived fluctuation.
The central bank projects the Consumer Prices Index (CPI) to return to its 2% target by the end of next year. The MPC was split when it voted to increase interest rates in August, with member Swati Dhingra voting to keep rates on hold, arguing that the cumulative effect of increases in borrowing costs had yet to fully impact economic growth.
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