There Is More Uncertainty on Bank of England Rates: Governor Andrew Bailey (Full Interview)

Bank of England Governor Andrew Bailey declared he is not surprised that markets scaled back bets on future interest-rate cuts on Thursday, saying the situation is “very finely balanced.”

Speaking in an interview with Bloomberg TV’s Francine Lacqua, Bailey reiterated his view that interest rates continue to be on a downwards path but said there is now more uncertainty over “when the steps are taken.”

Bailey made his comments hours after news of a closer-than-expected vote for a quarter-point rate cut prompted money markets to reduce wagers on the extent of future easing from the UK central bank. Traders now put the odds of a reduction in November at less than 50-50.

Only five Monetary Policy Committee members backed a cut at the August meeting, with the remaining four opting to keep borrowing costs on hold. Officials are deeply divided over the direction of interest rates as the UK is experiencing a resurgence in inflation while the labor market is cooling.

The vote split is a “very good reflection of the finely balanced decision,” Bailey said. “My message to markets is don’t read into it more than that.”

He added: “The fact that pricing is now more sort of 50-50 going forward, I think is a reflection of a fine balance. It doesn’t surprise me.”

The Bank of England cut interest rates to the lowest in over two years in a closer-than-expected decision that leaves investors with what Governor Andrew Bailey called “genuine uncertainty” on its next move.

The Monetary Policy Committee split 5-to-4 in favor of reducing rates by a quarter-point to 4% after deadlock forced it into an unprecedented second vote. The prospect of another reduction this year is now shrouded in doubt.

The decision saw two senior officials vote against Bailey, and featured new forecasts warning that inflation will now hit 4% in September — a reading that would be double its target and arrive just weeks before its next projections in November. The BOE also hinted at slowing the pace of so-called quantitative tightening in an annual review next month, warning of signs of strain in long-dated bonds.

Thursday’s outcome showed rate-setters growing more concerned over an unsettling resurgence in inflation driven by a spike in food bills, with retailers blaming the Labour government’s recent hike in payrolls taxes and the minimum wage. Officials are balancing those risks against mounting jobs losses and a “subdued” economy that could dampen future price pressures.

The BOE’s overtones of uncertainty chime with the sense of wait-and-see on display at global peers, with the Federal Reserve having held off on a rate cut so far this year to gauge inflation risks, and the European Central Bank committed to closely assessing the economy before determining its next move.

Bailey did insist in a press conference that the path for borrowing costs “continues to be downward” and that inflation will be temporary. However, he was more wary on when the next cut may arrive.

“There is, however, genuine uncertainty now about the course of that direction of rates,” he said.

It prompted investors to consider that a move in November — which would continue its once-a-quarter pace of cuts — now hangs in the balance. Money markets reduced wagers on the extent of rate cuts from the BOE, with the chances of one in November seen as less than 50/50. The pound jumped against the dollar, climbing 0.5% to $1.3431.

“The statement hints that officials think the easing cycle is nearing its end,” said James Smith, developed market economist at ING. “Policymakers are visibly worried about a more persistent bout of inflation as the headline number is way higher than target.”

Bailey described the judgment as “finely balanced,” with the split among officials so fragmented that an unprecedented second vote was needed to break the deadlock. That followed a three-way outcome without a majority. It was the first time in the MPC’s 28-year history that two rounds of voting were required for a presentable decision on rates.

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