BoE governor: path of interest rate cuts is shrouded in uncertainty
Bank of England governor Andrew Bailey has warned that the path of UK interest rates ‘is ‘shrouded’ in uncertainty, due to the turmoil created by trade conflict.
Testifying to the Treasury committee this morning, Bailey declines to predict how he might vote at the Bank’s next meeting, in late June.
Bailey believes that the path of UK interest rates, which were cut to 4.25% last month, is still lower. But, he warns, that process is harder to predict.
Bailey tells MPs:
“I think the path remains downwards, but how far and how quickly is now shrouded in a lot more uncertainty, frankly.”
He says the “the external situation” is relevent, reminding the commitee that the Bank has adjusted the language it uses to describe the economic environment, saying:
We’ve added the word ‘unpredictable’ to ‘uncertain’ , because of the sheer nature of what we’re dealing with.
[Reminder, the OECD cut its forecast for global economic growth in 2025 and 2026 this morning, due to the turmoil caused by Donald Trump’s trade wars.]
Policymaker Catherine Mann agrees with Bailey that the glide path for UK interest rates is downwards.
But, Mann cautions that it’s not possible to predict by what steps that journey will happen, or over what timeframe.
Deputy governor Sarah Breeden also believes the path for interest rates is lower, but tells MPs “there is uncertainty about how far, how fast.”
Key events
BoE’s Bailey: Trump has ‘blown up’ global trade system
Back at parliament, Bank of England governor Andrew Bailey has told MPs that the rules-based, multilateral trade system that has underpinned the global economy has been ‘blown up’ by Donald Trump’s trade wars.
During his testimony to the Treasury committee this morning, Bailey explained how the overall picture of global trade has been significantly disrupted over the last few months.
This will have serious implications, he argues, unless policymakers can rebuild that rules-based system.
Bailey explained that over recent decades, a pattern of world trade agreements had been build up which led to a lowering of tariffs. It was initally based, after the second world war, on the GATT which became the World Trade Organisation.
Govenor Bailey warned:
I’m afraid that system has now, really been blown up to a considerable degree by all of this.
That has very serious consequences for the world economy, he continued, while also acknowledging that some of the Trump administration’s criticism of that system are well-founded.
As Bailey put it:
We can’t say the US administration is just wrong-headed. There are things that have gone on in this whole trade picture which, I think, do point to the stress that that system has been under.
But he adds, there will be “very serious implications for the world economy” if policymakers abandon that system and say it’s never coming back.
He cites the example of ‘most-favoured nation status’, which means that a country offer the same trade terms to all trading partners.
[The unilateral tariffs which Donald Trump announced would be imposed on US trading partners in early April were clearly at odds with the concept of MFN status, before he paused them for 90 days].
Bailey says:
That has now gone, it just isn’t part of the current picture. That has very serious implciations.
He argues that policymakers need to “come back to the multilateral table”, admit there were problems with the old system, and work very hard to fix those problems, adding:
If we abandon it, we’re into a much more difficult world.
Concerns over Thames Water’s future continue to mount, after potential rescuer KKR walked away from a deal to inject fresh equity (see early morning post).
Lena Swedlow, campaigns manager of cross-party campaign group Compass, say’s KKR’s about-turn is a victory for Thames’s customers, arguing that the company should be under public ownership:
“KKR pulling out of negotiations with Thames Water is a victory for the people of the region for whom it is an essential resource. It’s a victory for the work of the Thames Water Emergency Board in bringing together households, workers, local government reps, environmental groups, and experts who should be included in decisions about the future of water companies.
But it shouldn’t be a sigh of relief. A company with their record should never have been an option to take over a vital resource for millions of us.
“The Government proved that taking essential industries into direct control was possible with Scunthorpe Steelworks back in April. Thames Water are in crisis as a direct result of private investment – public ownership is the only option.”
Union UNISON’s head of environment Donna Rowe-Merriman says ministers must be decisive, saying:
“The situation at Thames Water can’t go on. Customers and staff are being failed at every turn and deserve better.
With the options running out, the government must take decisive action sooner rather than later.
The company’s been saddled with billions of pounds of debt by private equity firms after huge payouts to shareholders and bosses.
Thames Water staff need certainty about the firm’s future and billpayers need assurances about soaring prices.
The Cunliffe Review highlights once again that the water industry is broken. Failure to fund regulators properly, and give them the powers they need, has left the sector mired in financial turmoil and sewage spills.
Only sustained investment will ensure a clean and safe water supply, safeguard the environment and protect customers.”
Šefčovič to meet Greer tomorrow to discuss trade
Lisa O’Carroll
The European Commission’s vice president Maroš Šefčovič is to meet US trade representative Jamieson Greer tomorrow morning in Paris as efforts to achieve a breakthrough on the threatened trade war intensify, my colleague in Brussels Lisa O’Carroll reports.
The world is currently holding its breath to find out whether Donald Trump will back down on his decision to double tariffs as of tomorrow on steel and aluminium products to the US to 50%.
But sources indicate it is unlikely that the EU will retaliate immediately given the delicacy of talks around the wider 20% reciprocal tariff plus tariffs on auto imports from the US.
The EU has the power to bring forward a €21bn package already agreed in April on the initial tariffs imposed by Trump on steel and aluminium.
However it has also agreed to try and find a swift path to settling their differences following Trump’s “good call” with European Commission president Ursula von der Leyen on 26 May.
At the time she emphasised the bloc’s readiness to act “swiftly and decisively”but said the EU would need until July 9 to finalise a deal.
It is understood they agreed to allow two weeks to play out from that call before taking any other steps, fuelling expectations that the EU would not retaliate against any new steel tariff tomorrow.
Turning to trade deals, BoE governor Andrew Bailey says that it’s “really good” to see the trade deal between the UK and India agreed in early May.
But, he warns, it will take time to see the economic benefits, as trade patterns adjust.
He reminds MPs that in the short-term, Brexit will have a negative effect on the UK economy by making it less open, but that damage can be reduced through trade deals.
Bailey adds that it would be a “good thing” if the UK can “rebuild trade with the EU, our largest trading partner” (echoing points he made last week).
Asked whether the dollar’s safe-haven status is under threat, BoE governor Andrew Bailey says non-US investors have been reassessing how much risk they want to take.
But, he suggests, many investors were probably ‘overweight’ on US risk in the past, due to an optimistic view of the US economy.
They’re reassessing that. And they will do that, and go on doing that I’m sure as this story unfolds.
But… Bailey says he doesn’t see the US dollar losing its reserve currency status. That status means US assets have a strong “embedded position” in the financial infrastructure, such as the way Treasuries (government debt) are used as a risk-free assets,
“it would take a lot to change that,” Bailey points out.
BoE governor questioned about Taco trade
Andrew Bailey then warns MPs that stock markets could suffer falls if trade war tensions flare up again.
He is asked about the recent recovery in share prices:
Q: Does the “dramatic recovery” in equity markets in recent weeks back up the hypotheses of the Taco trade – that the damage caused by president Trump is overstated because Trump always chickens out and is terrified of the bond markets?
Bailey says he won’t get into the question of the “taco thing’, telling MPs:
That’s a euphemism that people in markets have come up with. I don’t think the president particularly likes it.
Indeed….
Bailey agrees there has been a lot of volatility in the markets recently.
He is most concerned when you see rising bond yields, falling currencies and falling equity markets.
That became quite acute on two occasions after Liberation Day, and on both occasions the administration did respond – with a 90-day period to negotiate trade agreements with other countries, and with reassurance about the position of Fed chair Jerome Powell, Bailey says.
He cautions that policymakers need to watch this very carefully, as the equity markets are obviously discounting views of the future.
Bailey tells the Treasury committee:
They appear to be discounting a more optimistic view about how this will come out. We need to bear in mind, therefore, that their view is conditioned on that and if things change they will respond.
He adds that fortunately, we have not seen a real threat to financial stability from trade tensions.
BoE policymaker Swati Dhingra is hopeful that the UK will avoid a repeat of the recent inflation shock in the next few years, thanks to signs that trade war tensions is eased.
Dhingra tells the Treasury commitee that she is encouraged that prices will remain under control.
She is hopeful that the world will avoid fragmenting into multipolar trade blocks, as could have happened if Europe had retaliated against the US with similar tariffs, sparking a full-blown trade war.
Instead, given the way policy developments have panned out, Dhingra is ‘somewhat reassured’ that the impact of trade tensions will be milder than the worst case scenarios, and even some less severe scenarios.
However… BoE policymaker Catherine Mann warns that supply chain disruption can potentially lead to an environment of higher volatility in inflation, which can require higher interest rates to control prices.
Andrew Bailey: fragmenting world trade system is negative for growth
Andrew Bailey adds that there is “a lot more uncertainty and unpredictability” about the global trading system, and the global economy more widely.
Bailey tells MPs that the Bank must make two judgements:
1) what are the policies going to be.
2) what’s the impact of those policies.
The challenge with the first judgement is that the Bank needs to “stop the music” when it takes its decisions, Bailey says.
But the question of the impact is more important.
Bailey tells the Treasury committee:
The impact of fragmenting the world trade system is negative for world growth and world activity.
It obviously increases uncertainty, Bailey adds, saying he’s heard this message as he goes round the country meeting businesses.
That uncertainty causes delays to investment decisions. These are one-off decisions, and the appeal of waiting has gone up in the current climate, Bailey says.
He adds that the impact of trade tensions on prices is more ambiguous.
One argument is that it will lower world activity, which lowers world export prices which lowers inflation. That is ‘quite open to question’, though, the Bank of England governor argues.
But if supply chains are disrupted, it could have the opposite effect and create upward pressures on inflation.
“At the moment it’s frankly too soon to tell, Bailey concludes — which backs up his earlier point about the uncertainty that is shrouding the path of UK interest rates.
BoE governor: path of interest rate cuts is shrouded in uncertainty
Bank of England governor Andrew Bailey has warned that the path of UK interest rates ‘is ‘shrouded’ in uncertainty, due to the turmoil created by trade conflict.
Testifying to the Treasury committee this morning, Bailey declines to predict how he might vote at the Bank’s next meeting, in late June.
Bailey believes that the path of UK interest rates, which were cut to 4.25% last month, is still lower. But, he warns, that process is harder to predict.
Bailey tells MPs:
“I think the path remains downwards, but how far and how quickly is now shrouded in a lot more uncertainty, frankly.”
He says the “the external situation” is relevent, reminding the commitee that the Bank has adjusted the language it uses to describe the economic environment, saying:
We’ve added the word ‘unpredictable’ to ‘uncertain’ , because of the sheer nature of what we’re dealing with.
[Reminder, the OECD cut its forecast for global economic growth in 2025 and 2026 this morning, due to the turmoil caused by Donald Trump’s trade wars.]
Policymaker Catherine Mann agrees with Bailey that the glide path for UK interest rates is downwards.
But, Mann cautions that it’s not possible to predict by what steps that journey will happen, or over what timeframe.
Deputy governor Sarah Breeden also believes the path for interest rates is lower, but tells MPs “there is uncertainty about how far, how fast.”
BoE denies ‘group think’ charges
Bank of England governor Andrew Bailey has denied that there is a culture of “group think” on its Monetary Policy Committee.
He point out that chief economist Huw Pill voted to hold interest rates last month, while other Bank officials voted for a cut.
Deputy governor Sarah Breeden, who has voted with the majority at every meeting she’s attended so far, also pushes back against ‘group think’ accusations.
She says those majorities have often been a ‘broad church’, saying she has had a different interpretation of the economic outlook than colleagues (even if they voted the same way).
[the overall MPC did look rather disunited last month, with nine policymakers split 5-2-2 between a small rate cut, a large one, and no cut at all].
Here’s a live feed of the Bank of England’s appearance before the Treasury committee:
Dhingra: Do I need to start voting for larger rate cuts?
Treasury committee chair Dame Meg Hillier MP reminds Bank of England policymaker Swati Dhingra that she has now been outvoted at 16 of the 21 MPC meetings she’s attended.
Dhingra has been a persistently dovish member of the committee, and argues that interest rates could have peaked at a lower level (they hit 5.25% in August 2023, and were kept there until August 2024).
Last month, she voted for a half-point cut in rates, to 4%, while a majority voted for a smaller cut to 4.25% (and two policymakers, including Catherine Mann, wanted no change).
Dhingra tells MPs today that “keeping policy gradual is a good thing”. But the problem is that if interest rate policy has been held too tightly for too long, at some point that starts to “really play a role”.
Hinting that she could vote for larger rate cuts than in the past, Dhingra says:
“I now need to start thinking about ‘do I increase the decrements for which I’ve been voting, or not?’”
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