Andrew Bailey, the governor of the Bank of England, has hit back at critics who have claimed he has taken an "ultra pessimistic" view of the UK economy.
This week, Bailey painted an extremely dim picture of the UK economy, claiming that its present potential growth trajectory is the "worst" he has ever seen in his career.
"I have been written up this week as being an ultra-pessimist, but I don't see it that way. I see it as a realist view,' Bailey told Staffordshire's Daily Focus newspaper.
The Bank's latest forecasts indicate the economy will barely grow at all next year, or in 2025. The Governor has said the outlook for the economy is the worst he has ever seen. Britain struggles to boost low levels of growth, as taxes and interest rates rise.
The Bank of England Governor raised concerns over the UK's future prospects just days after the Office for Budget Responsibility (OBR) issued forecasts for the UK economy slightly more optimistic than the Bank of England.
In an interview with The Chronicle in Newcastle, Mr Bailey said: "If you look at what I call the potential growth rates of the economy, there's no doubt it's lower than it has been in much of my working life.
"It does concern me the supply side of the economy has slowed. It does concern me a lot."
Is The Governor Genetically Pessimistic?
When asked at the OBR press conference "Why Are Your Forecasts for GDP Growth So much Stronger Than The Bank of England's November Forecasts?" Professor David Miles said (with a smile) "Because we are genetically more optimistic than the Central Bank". It's a fair point..
He then went one to say "Actually, that's not really true. The variance is best explained by the differences over the underlying trend rate of growth and assessments of total factor productivity. Adding the possibility of a possible varying stance on the future path of interest rates may also come into play. But in general the Bank has a more cautious, more conservative, more pessimistic view."
Predictions of weak supply growth are one reason Mr Bailey and his colleagues on the Monetary Policy Committee (MPC) are keeping interest rates high. The governor added to warnings from Huw Pill, the Bank's chief economist, the supply side of the economy, which includes the availability of labour, could keep inflation stubbornly high over the coming years as a result of the ensuing pressure on wages.
So What About Rates?
The Bank of England will not cut interest rates for the "foreseeable future", Andrew Bailey has said, warning it was "too soon" to discuss the prospect of large-scale monetary easing. He warned the next stage of cutting inflation would be "hard work".
So far, inflation has fallen from a peak of 11.1pc in October 2022 to 4.6pc last month, when a drop in the energy price cap pulled the headline rate down from September's 6.7pc. The Governor said the job is not done yet, and warned families not to expect any steep falls in interest rates as the Bank battles to get prices back to its 2pc target.
"By the end of the first quarter next year, when a lot of that unwind will have happened, we may be a bit under 4pc (CPI) but we'll still have 2pc to go, maybe. And the rest of it has to be done by policy and monetary policy. And policy is operating in what I call a restrictive way at the moment."
He stressed that this requires rates to stay at their current level of 5.25pc for some time, despite the pain it inflicts on borrowers. He said: "I am very conscious of the position of the less well-off but we do have to get it down to 2pc and that's why I have pushed back of late against assumptions that we're talking about cutting interest rates or we will be cutting interest in anything like the foreseeable future because it's too soon to have that discussion."
Financial markets are currently betting that the first rate cut, from 5.25pc to 5pc, will come in the summer of 2024. Bailey and other Bank rate-setters have recently pushed back against financial market speculation that indicates at least two rates cuts before November next year, taking the base rate to around 4.75 per cent. That ain't go to happen says the governor!
Why So Gloomy? The "Sexy Turtle" will have his sway on rates ... but the OBR will have it's day on growth ...
The Saturday Economist
John Ashcroft publishes the Saturday Economist. Join the mailing list for updates on the UK and World Economy.
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