Bank of England to Discuss Future Rate Cuts

Bank of England Governor Andrew Bailey is set to address the progress made in reducing inflation in the U.K. during a speech at the U.S. Federal Reserve's symposium in Jackson Hole, Wyoming. He will highlight that headline inflation has significantly decreased, largely due to falling energy and food prices, and that higher interest rates have mitigated second-round effects like wage growth. However, Bailey will emphasize the need for continued caution, suggesting that monetary policy may need to remain restrictive longer than anticipated due to potential shocks in the labor market. Bailey will express a cautiously optimistic view, noting that risks to persistent inflation have diminished compared to a year ago. He will indicate that he currently favors a scenario where inflation persistence is self-correcting, allowing for a gradual easing of restrictions. Nonetheless, he will warn of two less favorable scenarios that could necessitate prolonged restrictions, hinting at structural changes in the economy stemming from recent shocks. Despite the positive signs, inflation in the services sector remains above 5%, and the Bank of England recently cut interest rates for the first time in four years. Markets are anticipating further cuts, with a 50 basis point reduction expected later this year. Bailey will stress that while progress has been made, the job is not yet complete, and the central bank must remain vigilant until inflation is sustainably back to the 2% target. In contrast, Federal Reserve Chair Jerome Powell has indicated that the U.S. central bank may soon adjust its policy, hinting at potential interest rate cuts in September. The differing approaches of the two central banks reflect their unique economic challenges, with Bailey advocating for a steady course in the U.K. as it navigates its recovery from a brief recession earlier this year.