Andrew Bailey said it was unlikely that interest rates would return to near zero as markets debate how far and how fast the Bank of England will ease borrowing costs.
“I would not expect (rates to go near zero) because what caused interest rates to go that way it was, amongst other things, two very big shocks to the economy,” Bailey said in an interview with Kent Online.
“It all started with the financial crisis then Covid was another big shock. To go back down to those levels, you’d have to have very big shocks. Of course, you don’t want very big shocks to happen,” he said.
The Bank of England was forced to rapidly raise interest rates following the pandemic and the Russian invasion of Ukraine, bringing the benchmark Bank Rate from near zero to a peak of 5.25 per cent last summer.
With inflationary pressures easing, rate-setters cut rates for the first time since the pandemic in August. However, they subsequently voted 8-1 to keep rates steady last week.
Following the decision Bailey stressed that the Bank should take a cautious approach, a message he reiterated with Kent Online.
“We still have to get (inflation) sustainably at the target and we have quite an unbalanced mix of components of inflation at the moment. But I’m very encouraged that the path is downwards therefore I do think the path for interest rates will be downwards, gradually.”
Inflation came in at 2.2 per cent in August, but the headline rate is expected to rise gradually over the remainder of the year as the downward drag of higher energy prices fades.
Services inflation, which the Bank has flagged as a crucial gauge of domestic inflationary dynamics, also rose to 5.6 per cent in August, demonstrating stubborn cost pressures.
Given lingering concerns over inflation, investors only expect one further rate cut this year, with the Bank likely to cut rates once a quarter over the next year. Most economists expect rates to settle around 3-3.5 per cent.
