The Bank of England is on course to stop raising interest rates; however, Governor Andrew Bailey warned on Wednesday that rising borrowing costs could linger due to ongoing inflationary pressures.
"I think we are much nearer now to the top of the cycle. And I'm not therefore saying we're at the top of the cycle because we've got a meeting to come. But I think we are much nearer to it on interest rates on the basis of current evidence," Bailey told lawmakers.
With the highest inflation rate among major economies, the Bank of England has hiked interest rates at 13 of its last 14 meetings. In the following weeks, borrowing costs are forecast to increase to 5.5%.
After Bailey's remarks, the 2-year and 10-year government bond yields hit their daily lows.
Bailey warned lawmakers in May that interest rates at the Bank of England were about to peak. Recently, top central bank officials have been very clear that interest rates will not be lowered, even if they are extremely high.
Bailey also commented that inflation in the UK is showing signs of decline, although the impact on wage growth, which has recently reached record levels, remains uncertain. "Many of the indicators are now moving as we would expect them to move and are signaling that the fall in inflation will continue and, as I've said a number of times, I think will be quite marked by the end of this year,” he said. "The question now is as headline inflation comes down, will we see inflation expectations continue to come down? And will that be reflected in wage bargaining?"
Bailey also emphasized that forthcoming interest rate decisions will aim to strike a delicate balance. Aside from that, the Deputy Governor for Financial Stability at the Bank of England, Jon Cunliff, highlighted the presence of conflicting economic signals, a characteristic feature during transitional phases.
Swati Dhingra, a fellow member of the Monetary Policy Committee at the Bank of England, cautioned that interest rates have reached a level where additional hikes could potentially harm the economy.
"Policy is already sufficiently restrictive, and the lagged effects of further tightening pose serious risks of output volatility in order to make a small dent on inflation," Dhingra said in an annual report to parliament's Treasury Committee. She also cast her vote in favor of maintaining the current rates during the most recent session of the Monetary Policy Committee.
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