The Bank of England governor, Andrew Bailey, has hinted that interest rates may stay high for longer than expected amid stubbornly high inflation.
Speaking at the annual conference of the European Central Bank, Bailey said it was clear financial markets expected several more interest rate rises.
“The market, I don’t think, thinks we’re nearly done at the moment. They’ve got a number of further increases priced in for us. My response to that would be: well, we’ll see,” he told the conference in Sintra, Portugal, on Wednesday.
“I’ve always been interested that markets think that the peak will be short-lived in a world [where] we’re dealing with more persistent inflation,” he added.
Financial markets expect the Bank to raise rates from the 5% level set earlier this month to 6.25% by the end of this year, which would be the highest since 1999.
The last time Bailey commented on financial market expectations was in November 2022, when the central bank had just raised interest rates to 3% and he cautioned against financial bets that interest rates would reach 5.25%.
Bailey’s intervention followed several weeks of turmoil after the then prime minister Liz Truss’s disastrous mini-budget.
Inflation has remained stubbornly high since then, leading Bailey and the Monetary Policy Committee (MPC) that he chairs to increase rates sharply.
In May, inflation was 8.7%, the same level reported in April and the highest of any major advanced economy.
“The cumulative data – both particularly on the labour market and on the inflation release we had, which to us showed clear signs of persistence – caused us to conclude that we had to make really quite a strong move,” he said.
The MPC received the endorsement of the International Monetary Fund at the conference after the Washington-based organisation’s European director told Bloomberg on the sidelines that the Bank had done the right thing in raising interest rates by 0.5 percentage points to 5% last week.
“Inflation has been more persistent than expected, so that tightening move was important,” said Alfred Kammer. “Are they going to achieve the inflation target by mid-2025? We are expecting that, and that’s one important element.”
He added: “We welcome the big move. Now the Bank of England needs to look meeting by meeting and see what happens on the inflation dynamics, if inflation is going to come down.”
Bailey said he understood that the high cost of borrowing placed a financial burden on many people.
“At the moment I can understand why there are critics of us,” he said. “We have a job to do. I am very clear that our job … is to return inflation to target and we will do what is necessary. I understand the concerns that go with that, but I am afraid I always have to say that it is a worse outcome if we don’t get inflation back to target.”
