'Too soon' to see price effects from tariffs, says Bank of England's Bailey

Yahoo

6 hours ago

Bank of England governor Andrew Bailey said it is "too soon" to see the price effects from the trade and tariffs action.
Speaking at the European Central Bank's annual Forum on Central Banking in Sintra, Portugal, Bailey said he was observing a 'softening' in the UK economy and 'softening in the labour market,' reinforcing expectations that the BoE's next move on interest rates will be to lower them.
Earlier in the day, Bailey left the door open to a rate cut at the monetary policy meeting in August.
'I think the path of interest rates will be gradually downwards, I've not changed my mind on that,' Bailey told CNBC ahead of the summit.
Futures markets are pricing in a 75% chance that the monetary policy committee will lower the base rate from 4.25% to 4% in August, with two more quarter-point cuts anticipated by year-end.
Bailey noted that the UK labour market, an important source of inflation pressure, is beginning to cool.
"The key question" for the next MPC meeting, he said, is whether that softening "is going to come through and create the context where inflation will come back down to target".
Read more: Eurozone inflation hits 2% ECB target after June interest rate cut
Average wage growth excluding bonuses slowed to 5.3% in May, according to the latest Office for National Statistics data, down from 5.6% a month earlier. Bailey said this easing, along with softer demand, would help bring inflation back to the Bank's 2% target. It currently sits at 3.4%.
Bailey also welcomed the decline in energy prices following the Israel-Iran ceasefire. This, he said, created a "helpful backdrop" for the MPC's deliberations.
He also acknowledged the impact of global uncertainty on UK business investment, suggesting the BoE may need to prioritise supporting growth. With British businesses 'putting off investment decisions,' Bailey hinted that further tightening could be counterproductive.
Elsewhere in Sintra, US Federal Reserve chair Jay Powell echoed Bailey's caution on tariffs, saying the full inflationary effects of Donald Trump's recent trade measures had yet to materialise.
'If you ignore the tariffs for a second, inflation is behaving pretty much exactly as we have expected and hoped that it would,' Powell said. 'We haven't seen the effects much yet from tariffs and we didn't expect to by now.'
He added: 'We went on hold when we saw the size of the tariffs, and essentially all inflation forecasts for the United States went up materially as a consequence ... We didn't overreact. In fact, we didn't react at all. We're simply taking some time.
"As long as the US economy was in solid shape, we think the prudent thing to do is to wait and learn more and see what those effects might be.'
The Fed chair's comments come as he faces mounting pressure from Donald Trump to cut rates to mitigate the consumer impact of the trade war. Powell, however, reiterated the Fed's independence: 'I'm very focused on just doing my job. The things that matter are using our tools to achieve the goals that Congress has given us.' His remarks were met with applause from the audience.
Read more: Global economy to slow amid 'most severe trade war since 1930s', says Fitch
Powell added he couldn't say whether the Fed could cut interest rates as soon as this month. "It all depends on the data", he insisted, adding that the Fed is going "meeting by meeting".
Christine Lagarde, president of the ECB, struck a cautiously optimistic tone in the wake of news that eurozone inflation had edged up to 2% in June from 1.9% in May — reaching the central bank's medium-term target.
'I am not saying 'mission accomplished', but I say 'target reached', OK,' Lagarde said. But she warned of continued uncertainty, citing geopolitical tensions and the risk of economic fragmentation as 'two-sided risks' to the inflation outlook.
'We have to continue to be extremely vigilant, and remain committed to delivering on the inflation target,' she said, concluding: 'We are well-equipped to navigate the tormented waters that we should anticipate.'