Homeowners and borrowers could be in line for a welcome reprieve after the Bank of England governor signalled that future interest rate hikes are far from certain.
In fresh comments that caught markets off guard, Andrew Bailey has suggested investors may be overestimating the need for higher borrowing costs, despite earlier expectations of multiple rate rises this year. The shift in tone has already prompted a rethink among economists, with JPMorgan Chase scaling back its forecasts for UK interest rates.
Markets ‘getting ahead of themselves’
Interest rates were held at 3.75% last month by the Bank’s Monetary Policy Committee (MPC), and Mr Bailey made clear there is no rush to tighten policy further.
He told Reuters: “We will have to, obviously, act on monetary policy if we think it’s appropriate to do so. But it strikes me… that the most important thing to do is to tackle the source of the shock.”
He added that any action must limit harm to the wider economy, saying: “We have to do so in a way that… causes the least damage in terms of activity in the economy and in terms of jobs.”
Crucially, Mr Bailey warned investors directly that expectations for rate rises may be overdone.
“(The market)’s still pricing us to raise rates… I think they’re getting ahead of themselves,” he said.
That stance marks a clear pushback against market bets that had previously priced in up to four rate hikes this year. This same speculation has seen British bank and building societies announce sharp rate rises on new home loans,
JP Morgan slashes rate hike forecast
Following the remarks, JP Morgan economists moved quickly to revise their outlook. The bank now expects just one rate rise in June, instead of its previous forecast of two increases in April and July. In a note to clients, its chief UK economist Allan Monks said: “Bailey’s comments suggest April is too soon for a majority for a hike to develop.”
The shift is significant, suggesting the first move could come later – and be more limited – than markets had been anticipating.
War-driven inflation dilemma
The Bank is grappling with a fresh inflation shock driven by the Iran war, which has pushed up global energy prices while simultaneously weakening economic growth.
Mr Bailey described the situation as “intensely frustrating”, as policymakers had previously expected inflation to fall steadily back towards the 2% target. Instead, inflation is now forecast to reach around 3.5% later this year – well above target, but still far below the 11.1% peak seen in 2022.
Unlike that earlier surge, however, Mr Bailey stressed that businesses today lack the ability to pass on higher costs.
“Businesses consistently say to me that they’re operating in a context of an absence of pricing power,” he said.
Key difference from 2022
The Governor drew a sharp contrast with the post-Ukraine invasion inflation spike, highlighting a weaker economic backdrop. The labour market is softening, growth is subdued, and the economy is operating below potential – all factors that reduce the case for aggressive rate hikes.
While some policymakers may argue for a precautionary increase to contain inflation, Bailey signalled caution, suggesting such a move may not align with the Bank’s remit.
What happens next
The next crucial moment comes on April 30, when the MPC announces its latest rate decision.
For now, Mr Bailey’s intervention has thrown cold water on expectations of rapid tightening – and handed households and borrowers a potential reprieve.