Bank of England Governor Andrew Bailey says UK's recession is 'very weak'

20 February 2024 , 14:40

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Andrew Bailey, Governor of the Bank of England, said that interest rateas could be cut before the inflation rate falls to the 2% target (Image: PA Wire/PA Images)

Bank of England Governor Andrew Bailey has shared that the UK's recession is "very weak" and hinted that interest rates might be cut even before inflation drops to 2%.

Mr Bailey explained that the small drop in gross domestic product (GDP) in the last two quarters makes this recession much less severe compared to those since the 1970s. "We have a very precise definition of a recession in this country as two successive quarters of negative GDP growth," he said during his talk with the Treasury Select Committee. The two successive quarters... last year, I think, cumulatively add up to minus 0.5% on GDP."

He pointed out that previous recessions had much bigger drops, so this one isn't as tough. Dr Ben Broadbent from the Bank of England said that other countries like the US have different ways of defining a recession.

Mr Bailey also said that the Bank's Monetary Policy Committee (MPC) might lower interest rates before inflation hits the 2% target, which they expect to happen sometime this spring. He wants to see steady progress in reducing inflation, especially in services, wages, and jobs.

"We've seen, I think, encouraging signs on them. So, services inflation is still above 6%, there are some signs of it coming down now. I think some signs that pay is now adjusting down towards the lower headline inflation, which is what I'd expect to see. The quantity side of the labour market remains tight, there's no question about that. But it's the progress of those three things."

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Mr Bailey added: "We don't need inflation to come back to target before we cut interest rates, I must be very clear on that, that's not necessary. We'll be looking for sustained progress on those things to reach that judgment about how long this period of restrictive policy needs to be."

Swati Dhingra, another member of the Monetary Policy Committee (MPC), warned that keeping interest rates high "for longer" could hurt parts of the economy. She said: "Despite the disinflation at play, and despite the fact that there has been some real wage recovery, we're still seeing consumption very weak and very different from some of the other advanced economies where there has been a bounce back from the pre-pandemic levels,"

She added: "Here, we aren't seeing that, even after January's retail sales, unfortunately, (retail sales are) about 2.1% lower. think that suggests to me that the downside risks at this point are substantial and, therefore, if we keep monetary policy tight for longer, that would weigh even further on that sort of real relativity."

Lawrence Matheson