BoE Governor says “corner has been turned” — Andrew Bailey insists worst of UK inflation over — explained

There have been two consecutive months in which the pace of price increases has decreased, and today, the under-pressure Bank of England Governor Andrew Bailey said that “the corner has been turned” on inflation, and that Britain will have a “long but shallow” recession.

Mr. Bailey made his remarks in Wales a day after the Consumer Price Index dropped to 10.5% for December from 10.7% in November and a 41-year high of 11.1% in October.

Mr. Bailey said the drop in the CPI was “the beginning of an indication that a corner has been turned,” according to an interview with the Western Mail carried on the BusinessLive website.

As per the interview, he believes the most probable conclusion is that it (inflation) will decline pretty swiftly this year, perhaps beginning in late spring, and that has a lot to do with energy prices.

Bailey did, however, voice a word of caution about pay, which is increasing at almost record levels.

Bank of England inflation rate forecast UK: 0.5 per cent increase expected in February 2023

A 0.5% increase to 4% is anticipated by the Bank's Monetary Policy Committee in early February.

The Governor of the Bank of England has stated that inflation is expected to continue falling at a rapid pace beginning in the spring, although there is a risk that the tight labour market in the United Kingdom will create additional inflationary pressures, requiring the bank to intervene by raising interest rates.

On his last official visit to South Wales before the Bank of England's Monetary Policy Committee meets in February to decide on the base rate (now 3.5%), Andrew Bailey noted that the central bank continues to expect a mild but brief recession for the UK economy.

Since interest rate hikes are the central bank's primary tool for bringing inflation back down to target levels of 2%, he was unable to speculate as to when and where those rates may peak.

On the other hand, he pointed out that the bank hasn't made any comparable interventions since last November, when it was deemed uncommon for the institution to remark on the market's judgement that interest rates going to a top of 6% was too high. Interest rates, according to the prevailing market consensus, may reach a maximum of 4.5 per cent.

BoE forecasts 5.2% inflation Q4, 2023

The Bank of England predicted in its November 2018 Monetary Policy Report that inflation would drop to 5.2% in the fourth quarter of 2023 and then fall below its goal of 2% in the first quarter of 2024. According to Mr. Bailey, his opinion has not altered.

According to Mr. Bailey, who spoke at the Blackwood, New Jersey, production facility of family-owned baking business Brace's, the drop in the rate of inflation to 10.5% this month, after another minor dip in December, was predicted and was “the beginning of an indication that a corner has been turned”.

What they believe is the most probable conclusion is that it will decline very fast this year, possibly beginning in the late spring and that has a lot to do with energy prices, the speaker stated in reference to inflation.

While energy costs were relatively stable during the winter, we anticipate a precipitous decline once spring arrives. One, it's mathematical in that it's a yearly computation, so the large base effects of the previous year will gradually fade. In fact, as we demonstrated in our November monetary policy report, this trend will accelerate unless something unexpected occurs.

Bailey added that the second thing that has occurred in the past couple of months is that notably energy costs have begun to fall down and gas prices quite a little really since the beginning of the winter. 

Unfortunately, the method in which prices are determined, especially in the domestic market, means that this is not yet having an effect. That's promising news that her attributed to our milder winter and Europe's increased stockpiles. Inflation expectations have been raised as a result of the belief that the next year would be rather smooth sailing.

He also noted that the Bank is concerned most about the future of the labour market in terms of inflationary risks. He said they’ve seen this extraordinary, distinct drop in the labour force. 

A comparison to the time before the advent of Covid suggests that it is at least half a million. A decline in the labour force and an increase in inactivity have contributed to a little uptick in the unemployment rate, which is still at historically low levels but is placing pressure on the job market.

When Bailey goes to other regions of the nation, he hears similar experiences to the ones he heard when visiting businesses in South Wales: Despite recent weakness in economic activity, the labour market is extremely competitive and that is impacting salary talks.

BoE’s stance on interest rates outlook for the UK: Down from 6 to 5.2 to 4.5 per cent

Mr. Bailey said the following about the future base rate: first, pointing out that the BoE doesn’t target a particular peak, but he noted the following: back in November, and quite unusually for them, the BoE thought the market curve, and therefore the market's view of what it thought they would do, was out of line with their own thinking. 

The truth is that after what happened in September and October (the impact from Kwasi Kwarteng's Budget during Liz Truss' brief leadership), there was still what Bailey call a UK risk premium in there.

He added that, during that time period, the market's expectations for where they would end up were as high as over 6%, but once they made their estimate in November, it dropped to 5.2% and is currently at 4.5%. 

Bailey doesn’t think 4.5 per cent is necessarily appropriate, but others may have noted that in December the BoE omitted their earlier caveat that the market was, in their opinion, “somewhat out of line”.

BoE’s British economy outlook: Remains at pre-Covid levels, Bailey foresees a recession, but energy costs down

He said that the amount of activity in the economy is below where it was pre-Covid (GDP) and has stayed roughly 0.3% lower. 

Mr. Bailey said of the British economy. There is constant reminiscing about how quickly society bounced back after Covid's worst. The economy plummeted, and then slowly began to recover, but the subsequent years have been arduous. 

This is in line with the reality that the nation has seen a significant drop in real income, which has had an apparent impact. It is essential that we find a means to deal with the inflationary effects of this shock. For this reason, Bailey said he worries and is well aware that the BoE has earned the label of “pessimists” for predicting a recession back in November.

Further, Bailey now believes the recession will have the quality of being “long but shallow”. I think it's good news that energy costs have decreased. The recent drop in oil and gas prices will cushion the blow to disposable income. 

Inflationary pressures should ease somewhat as a result of the downward slope of the market interest rate curve and the relatively modest strengthening of the currency rate.

Bailey would say there is a pattern of poor activity over quite a long time, but there are contributing variables, and we will have to perform the study over the next couple of weeks (next monetary report) to see what we convert them into. 

When people speak about a recession, he realises they are using a harsh term, but in reality, this downturn is mild in comparison to others in history.

UK workforce decline mirrors the EU, says Bailey

Mr. Bailey said that the decline in the UK workforce since Covid, caused by emigration of EU citizens, the effects of extended Covid sickness, and early retirements, was not an issue unique to the UK. He did, however, note that other economies have seen a resurgence in the workforce, suggesting that the problem may be unique to Britain.

According to the BoE governor, a lot of nations during the pronounced Covid era saw a reduction in their labour forces, but the UK is exceptional in not having fixed itself.

Since the Westminster Government has made it clear that it will not increase immigration to address labour shortages, it is focusing on getting those who have left the labour force to come back.

When asked whether he agreed with the British government's claim that raising wages in the public sector, where it has risen at a far slower rate than in the private sector, would contribute to inflation, he said, “Again that is not for us” (to comment on).

But he did add that if you look at pay settlements in aggregate he has been worried that he may have what he’d call second-round impacts, which is what they are most concerned about in terms of the impact and how we would have to hike interest rates. 

This external, in a sense forced shock, is producing inflation and a drop in national real income, and although it's reasonable that individuals would want to keep up, doing so as a whole economy would lead to greater inflation and, honestly, higher interest rates to calm it down.

What happens to interest rates in recessions UK?

Loan demand drops and interest rates go down as investors seek safety during a recession. This means less compound interest. 

It is possible for a central bank to reduce short-term interest rates and increase asset purchases in a recession. The acts have immediate effects on the economy and signify the central bank's intention to maintain an easy monetary policy for a longer period of time.

Do mortgages rise in a recession UK?

Is it a good time to purchase a home in the UK, considering the current economic climate?

Unemployment is the primary concern for would-be homeowners during economic downturns. However, if employment is stable, and you have an emergency fund homebuyers may find recessions to be a good time to join the market since prices tend to fall during these periods. 

Takeaway

Bailey says the BoE keeps a careful eye on the payroll data for the economy as a whole. When it comes to monetary policy, we are not differentiating between the public and private sectors.

While there are now indications that wages are, on the whole, continuing on the rise, certain forward-looking polls of earnings and compensation are not as robust as that. This is why we are collecting as much data as we can.

What is certain is that a prolonged recession is underway in the UK. British citizens will need to prepare for it on multiple levels.