While more rate increases are on the wayBailey’s comment about a return to a “low global equilibrium” is one of the first suggestions that the Bank expects higher interest rates to be short-lived.
Factors such as extending lifespans have pushed interest rates down worldwide in recent decades as people save more for retirement and are expected to continue to do so,” the governor said.
Technological changes have also been significant as automation spreads through the economy.
So far there is no clear evidence that the pandemic will change this, despite some economists warning that Covid has untied some of the globalization that has helped inflation, and thus interest rates, have remained low in recent years. .
“It is too early to say what the long-term impact of the pandemic will be on the economy,” the governor said in a speech to the Official Monetary and Financial Institutions Forum.
“It’s worth bearing in mind that while the pandemic was a major and unprecedented economic shock, with sweeping changes in labor markets and the way we work, it’s possible that the long-term impacts on productivity will be small. “
Britain is highly exposed to global forces and international money flows, forcing the Bank to set its interest rates based on those global borrowing costs.
“For an open economy like the UK, the trend real interest rate is determined by global forces; since capital can move freely around the world, interest rates would depend on the balance of savings and investments in other countries and in the UK,” the governor said.
The comments suggest the impact of the rapid rises in interest rates – such as: a slowdown in the housing market and pressure on indebted companies, and aid to beleaguered savers – could only be short-lived if the Bank cuts interest rates again in the coming years.
Bailey has not committed to any specific measures related to interest rates in the coming months, but emphasized that the MPC will “take the necessary steps to bring inflation back to the 2 percent target”.
“The scale, pace and timing of any further increases in bank rates will reflect the committee’s assessment of the economic outlook and inflationary pressures,” he said.
“The Committee will be particularly vigilant for indications of more continued inflationary pressures and will act vigorously if necessary. Our job is to bring inflation back sustainably to the 2 percent target, no ifs or buts.”
The financial markets currently expect the Bank to raise its base rate to 2 pc. by September and at least 2.5 pc. by the end of the year.