BoE’s Bailey: We expect recession will be very small
Q: So, now inflation is down to 4%, and forecast to hit 2%, and the economy is in recession, what would it take for you to cut interest rates now? What indicators do you want to see?
Andrew Bailey tells MPs that the Bank expects inflation to fall to its 2% this spring, but he warns that it wonât stay there â as the inflation rate is being moved by changes in energy prices which wonât be permanent.
The Bank, thus, expects inflation to pick up by the end of this year (as it forecast earlier this month).
Bailey says monetary policy has been restrictive in the run-up to the current recession, but also points out that supply side growth has been unusually weak in the period (a hint that the Bank wonât take all the blame for the recession).
Bailey also points out that Britain is at âfull employmentâ, which is a âvery good storyâ.
And he tells the Treasury committee that the Bank expects it will only be âa very small recessionâ, adding;
We think the economy is already showing distinct signs of an upturn.
[Reminder, the economy shrank by 0.3% in October-December, after a 0.1% contraction in July-September].
He adds that the Bank wants to see sign that inflation persistence easing. So it will look at services prices, pay rises, and âquantities in the labour marketâ, when assessing when interest rates could be cut.
Key events
Bailey: We are not seeking a recession
Q: Does the Bank see a recession as a ânecessary evilâ in getting inflation down in the long term?
âWeâre not seeking a recession, definitely not.â Andrew Bailey insists, adding:
âWe donât target growth, we target inflationâ.
Bailey: tax cuts aren’t necessarily inflationary
Labour MP Keir Mather turns to fiscal mattersâ¦
Q: Is the Bank anticipating tax cuts in the budget?
Andrew Bailey says the Bank never anticipates fiscal changes â it models them after it happens.
Q: But have you a view whether the tax cuts being reported could be inflationary?
Bailey says the Bankâs view is that the tax cuts in the autumn statement will have a positive effect on GDP, but wonât have much effect on inflation at all.
Thatâs because measures such as lowering national insurance should help the supply side of the economy; by encouraging people into the labour market.
Q: You also donât know when the election will beâ¦.
I was hoping someone would tell us, Bailey jokes.
âBefore next Februaryâ, someone chips in helpfully.
Q: .. are MPC members holding off cutting rates because of tax cuts in the budget are a âknown unknownâ?
Thatâs âvery definitely not part of our thought processâ, governor Bailey insists, saying the Bank doesnât anticipate fiscal events or the election.
Broadbent: Interest rate risks are both ways….
Ben Broadbent brushes aside the notion that the Bank is being too tardy to cut rates, despite the pain being felt in the economy by households and businesses.
Asked about the risk that interest rates are overly restrictive, Broadbent points to the split at the MPC this month.
Clearly thereâs a risk, but thereâs also a risk that theyâre not sufficiently.
There were two of us who voted for still higher interest rates.
Broadbent also disputes the claim that all the evidence is for a cut now.
In my experience, and Iâve been doing this quite a while now, it is never the case that every lead indicator points in the same direction.
Broadbent does agree that thereâs been good progress in easing inflation. But a lot of the disinflation has been the unwinding of pandemic effects, such as on goods prices.
Services inflation and wage inflation, though, are running over 6%, Broadbent adds, which is roughly double where the Bank thinks they should be to achieve price stability.
But⦠MPC dove Swati Dhingra points out that keeping rates high for too long runs the risk of a hard landing, and the risk of damaging the supply capacity of the economy (which is why she voted to cut rates this month).
Andrew Bailey then denies that the Bank is âbehind the curveâ on shifting towards cutting interest rates.
He says the Bankâs position has moved; it is now focused on how long rates must stay at their current levels, rather than mulling further rate rises.
MPC member Megan Greene flags the risk of cutting interest rates too early, only to see inflation take off again, forcing the Bank to tighten again.
(This is a lesson she learned growing up in the US in the 1980s, when Paul Volcker forced inflation out by keeping interest rates high, after the volatility of the 1970s).
MP: The lights are flashing red for rate cuts
John Baron MP demands to know why the Bank arenât cutting interest rates now, when the economic warning lights are âflashing redâ.
Baron cites âvery pedestrian growthâ in the labour market, CPI inflation trending downwards, an easing in the labour market, and a deceleration of retail goods prices.
BoE governor Andrew Bailey reminds the committee that inflation is not forecast to be as low as 2% (its target) at the end of the year, so the question is how long must policy remain restrictive.
âWeâre not there yet,â (able to cut interest rates) Bailey adds.
Thérèse Coffey suggests the Bank is being held back by groupthink on its Monetary Policy Committee.
Q: The internal members of the MPC seem to vote en bloc â would it be better to just have one collective vote from those members?
Currently, each of the nine members gets one vote each â there are five internal members, and four external experts.
Bailey insists the MPC are very independently minded, and points out that around 25% of MPC meetings in the last two years have seen a split among the executive (internal) members.
Q: Whatâs an acceptable leeway in the accuracy of your forecasts?
Andrew Bailey explains that the Bankâs forecasts are conditional, so their accuracy depends how conditions move (ie: itâs not fair to set a pass/fail score).
Currently, the BoE provides fan charts which show the likelihood of various outcomes; it could potentially shift to a scenario-based set-up instead (this is something Ben Bernankeâs review could recommend).
He also pushes back against criticism for forecast-failings, pointing out that no economic model can predict wars or pandemics.
BoE deputy governor Ben Broadbent has also told MPs that interest rate cuts during 2024 are possible, but the timing depends on the inflation outlook.
In an annual report to the Treasury committe, Broadbent says the Bankâs forecasts donât rule out an easing of policy in 2024, adding:
âIn my view that is the more likely direction in which Bank Rate is likely to move.
But even if that proves to be the case, the timing of any adjustment can only depend on the actual evolution of the economic data.â
Broadbent: technical definition of a recession is unhelpful
Bank of Englandâs deputy governor Ben Broadbent also wades in about the UK recession.
Broadbent says he finds the technical definition of a recession (two quarterly falls in GDP in a row) to be âunhelpfulâ.
Broadbent tells MPs that in the decade before the financial crisis, the UKâs trend supply growth was 3% per year, or 0.75% per quarter.
We now think trend supply growth is less than 1%, with productivity having actually fallen in the last year.
In that environment, a 0.1% rise or fall in GDP is a tiny difference, Broadbent says.
He points out that in the US, the National Bureau of Economic Research decrees when the country is in recession (and tends not to rush its verdict).
Secondly, the data can be revised â Broadbent reminds the Committee about the days when there was excitement that Britain was falling into a triple-digit recession; in the end, we didnât even have two dips.
Andrew Bailey says itâs ânot unreasonableâ for the markets to expect the Bank to cut interest rates this year.
But, the Bank does not endorse the market curve [where investors expect rates to be in future], or say when it will cut rates, or by how much, though, he adds.
Q: Former chief economist Andy Haldane thinks the Bank could be too late to start cutting rates, having been slow to start raising them â whatâs your reaction?
Andrew Bailey repeats his point that the UK labour market remains strong, despite the âtechnical recessionâ.
He says the two quarters of negative growth, in Q3 and Q4 last year, only add up to a 0.5% drop in GDP.
If you look at recessions going back to the 1970s, this is the weakest by a long way.
The range for those recessions is GDP falls of between 2.5% and 22%, for the equivalent two quarters, Bailey says.
Q: But how does the UK economy grow, if you have risks of inflation even when youâre in recession?
Through two ways, Bailey adds â first, you get price stability (which is the Bankâs job) and second you grow the supply side of the economy (which is not).
MPC member Megan Greene tells MPs that she changed her vote on interest rates â from a âhikeâ to a âholdâ – this month, due to signs that inflationary persistence is easing.
But although the signs are encouraging, Greene wants to see this continue before she changes her vote to a âcutâ.
There are still ârisksâ, Greene adds, citing the Bankâs Agents survey which suggests wage growth of 5.4% this year.
Q: When will former Federal Reserve chair Ben Bernanke publish his review of the Bankâs forecasting models?
Andrew Bailey reassures the Treasury Committee that Bernanke is busy writing, and working very hard.
We might get the fruits of Bernankeâs labours in mid-Spring, Bailey suggests.
Thereâs a lot of interest in Bernankeâs work, which will try to explain why the BoEâs economic forecasts have been so wide of the mark in recent years.
MPs want more detail on the timing; after all âspringâs happening now,â points out Angela Eagle MP.
Bailey is reluctant to be pinned down too tightly, but suggests it may come in April.
Andrew Bailey adds that the Bank is seeing some âencouraging signsâ on inflationary pressures, including a slowdown in service sector price rises and in pay growth.
We donât need inflation to come down to target before we cut interest rates, Bailey insist.
BoE’s Bailey: We expect recession will be very small
Q: So, now inflation is down to 4%, and forecast to hit 2%, and the economy is in recession, what would it take for you to cut interest rates now? What indicators do you want to see?
Andrew Bailey tells MPs that the Bank expects inflation to fall to its 2% this spring, but he warns that it wonât stay there â as the inflation rate is being moved by changes in energy prices which wonât be permanent.
The Bank, thus, expects inflation to pick up by the end of this year (as it forecast earlier this month).
Bailey says monetary policy has been restrictive in the run-up to the current recession, but also points out that supply side growth has been unusually weak in the period (a hint that the Bank wonât take all the blame for the recession).
Bailey also points out that Britain is at âfull employmentâ, which is a âvery good storyâ.
And he tells the Treasury committee that the Bank expects it will only be âa very small recessionâ, adding;
We think the economy is already showing distinct signs of an upturn.
[Reminder, the economy shrank by 0.3% in October-December, after a 0.1% contraction in July-September].
He adds that the Bank wants to see sign that inflation persistence easing. So it will look at services prices, pay rises, and âquantities in the labour marketâ, when assessing when interest rates could be cut.
MP: Interest rate rises tipped UK into recession
Treasury Committee chair Harriett Baldwin MP begins the session by reminding the Bank of England that it raised interest rates 14 times in a row to bring down inflation from âintolerably high levelsâ.
She pins the blame for Britainâs fall into recession on the Bank, saying:
Clearly, by the second half of last year, that had tipped the UK economy into recession.
