Governor explains why return to zero is unlikely
The law of gravity may dictate that what goes up, must come down – but don’t think that will apply to the Bank of England base rate.
Governor Andrew Bailey suggests that interest rates will stabilize above pre-COVID levels, after marking the first rate cut since early 2020. However, in an interview with Bloomberg TV, Bailey emphasised that the bank’s decision reflects a shift from the exceptionally low rates seen during global crises.
“Don’t expect we’re going back to zero because zero was the product of huge global shocks,” Bailey said, referring to the financial crisis and pandemic. “We’ll be lower than we are today but I think it’s very clear that we’re not going back to zero.”
The reduction is a signal of the bank’s intention to manage monetary policy cautiously, avoiding consecutive rate cuts to prevent a resurgence in inflation. The Monetary Policy Committee did not specify the future pace of rate adjustments or the long-term target level.
Bailey explained: “I’m not giving you any view on the path of rates to come — I’m saying we will go from meeting to meeting, as we always do.” He noted that while the bank will continue to assess conditions on a case-by-case basis.
Interest rates impacting households
The rate cut may offer limited relief to households grappling with the cost-of-living crisis, particularly mortgage holders who have been heavily impacted by previous rate hikes. Nationwide reported that borrowers with a 25% deposit are facing five-year fixed rates of 4.6%, more than double the pre-pandemic average.
Robert Gardner, Nationwide’s chief economist, indicated that while fixed-rate mortgage pricing anticipates future declines, the immediate impact of the rate cut will be modest. “The impact is likely to be fairly modest as the swap rates which underpin fixed-rate mortgage pricing already embody expectations that interest rates will decline in the years ahead,” Gardner said.
The BOE also revised its economic growth forecasts. Chief economist Huw Pill noted that while growth has picked up recently, it follows a period of significant weakness. “We’ve seen growth pick up at a time when we have brought inflation back to our 2% target — that is a pretty positive story,” Pill said in a virtual Q&A webcast. However, he cautioned against overstating recent growth, given the economy’s previous recession and uncertain future trajectory.
As the BOE navigates this phase of monetary policy, both the central bank and market participants will be closely watching the implications for the broader economy and individual financial circumstances.
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