Bank of England’s Interest Rate Outlook

LONDON (Reuters) – The Bank of England should be able to lower interest rates gradually as it gains confidence that inflation will remain close to its 2% target, Governor Andrew Bailey said in an interview published on Tuesday.

Bailey expressed being “very encouraged” by the downward path of inflation since it peaked at 11.1% nearly two years ago.

“I do think the path for interest rates will be downwards, gradually,” he told the Kent Messenger newspaper.

“Inflation has come down a long way,” Bailey added. “We still have to get it sustainably at the target and we have quite an unbalanced mix of components of inflation at the moment.”

British inflation was 2.2% in August, but the central bank remains concerned about high rates of growth in services prices and regular wages, both rising at an annual pace of more than 5%.

Asked where interest rates would settle, Bailey indicated that he did not expect them to return to the historic lows close to zero last seen four years ago. His best guess was that it would settle at a neutral rate which he was unable to specify.

Last week, the BoE kept its main interest rate unchanged at 5%, having previously cut it from a 16-year high of 5.25% in August.

Economists polled by Reuters expect the BoE to cut rates to 4.75% at its next meeting in November.

Bailey previously mentioned optimism about further rate falls, but also cautioned that cuts would need to be gradual, urging the BoE to be careful not to cut too fast or by too much.

During a visit to southeast England, including the port of Dover (NYSE:DOV), the main route for freight and passenger travel between Britain and continental Europe, Bailey discussed the economic impact of Brexit:
“What we have seen, there will be some short-term painful effect on trade. But over a longer period of time … that trade will be redirected.”