Bank of England Governor, Andrew Bailey, indicated on Wednesday that the UK is approaching the peak of its interest rate cycle, but cautioned that further increases may still occur due to persistent inflation pressures. This comes as the Bank has increased rates 14 consecutive times in an effort to curb rapid price increases among major global economies.
Interest rates currently stand at their highest level in 15 years, at 5.25%. Some economists predict a rise to 5.5% later this month as pressure mounts on the Bank to control inflation. Despite this aggressive strategy, inflation remains stubbornly high, with the Consumer Prices Index (CPI) inflation falling to 6.8% in July from 7.9% in June, significantly above the government's 2% target.
Addressing MPs during a Treasury Committee session, Bailey stated that there is no longer a clear upward path for interest rates and that future decisions will be more evidence and data-driven. "I think we are much nearer now to the top of the cycle... based on the current evidence," Bailey said, clarifying that no decision has been made prior to policymakers meeting later this month.
Bailey also reiterated his earlier forecasts that inflation will fall sharply towards the end of the year. However, he warned of a potential uptick in August due to the impact of fuel prices. "It is possible that we will get a tick-up in the next release, as fuel prices went down in August last year but up this August," he noted.
The Bank chief also highlighted concerns about wage growth contributing to inflation. He expressed surprise over continued pressure from wage bargaining by private-sector workers on UK inflation and cautioned employers against raising staff wages higher than the level of inflation.
Deputy Governor Sir Jon Cunliffe echoed Bailey's sentiments, stating that while business investment and activity have slowed due to higher interest rates, there is no expectation of a credit crunch. He acknowledged an increase in more indebted companies but said these levels were not near past peaks.
In light of higher interest rates, Bailey recognized the potential impact on renters, particularly those in lower-income groups who make up a large portion of the private rental market. Nevertheless, he maintained that failing to control inflation would have more severe consequences.
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