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Inflation may not fall as quickly as quickly as hoped, Andrew Bailey has said, as he warned financial markets were getting carried away with the recent drop in price rises.
The Bank of England Governor told MPs on the Treasury Committee that market traders are “underestimating” the threat of inflation proving stubborn after it fell to a two-year low last month.
Mr Bailey said: “I really think the market is putting too much weight on the current data releases and the fact that we’ve seen inflation come down quite rapidly.
“I think it’s sensible based on what we’ve seen to date to keep [interest] rates where they are.”
It came after official data published last week showed inflation fell sharply in October to 4.6pc from 6.7pc a month earlier, but still more than double the Bank of England’s 2pc target.
Mr Bailey said that while the decline was positive it was “largely news that we expected” amid the unwinding of the shock that followed the energy crisis, triggered by Russia’s invasion of Ukraine.
The good news was unlikely to last, he told MPs: “We’re not going to get another one like last week.”
While the pound strengthened slightly against the dollar after the remarks, traders’ expectations that interest rates will fall from their 15-year high of 5.25pc next year held firm.
The Bank’s chief economist, Huw Pill, recently became the first UK rate-setter to suggest that interest rates could soon fall.
Markets are pricing in that interest rates will slip to 4.5pc by November next year, with the first reduction anticipated as early as May.
High street banks have also gradually been lowering mortgage rates, with TSB and HSBC announcing cuts on Tuesday after Virgin Money did the same a day earlier.
Mr Bailey warned on Tuesday that even very modest growth has potential to stoke inflation as the economy’s “speed limit” had fallen, and the Israel-Hamas war could still push up energy prices.
The Bank’s officials were also concerned about the potential of high wage growth to keep pushing up services inflation, highlighting that two thirds of pay pressures feed through to prices.
Mr Bailey comments came a day he warned that interest rates could need to rise further still should there be further signs of persistent inflation.
Catherine Mann, an external rate-setter on the Bank’s Monetary Policy Committee, told MPs that there were many risks to inflation and interest rates could well still be too low.
She pointed to surveys suggesting firms were expecting to raise their prices by 4.5pc to 5pc next year and give similar wage increases.
Ms Mann, one of the committee’s most hawkish members, said: “Looking forward, I see continued price pressures coming through firms’ expectations.”
The head of the European Central Bank, Christine Lagarde, also warned on Tuesday that inflation could still shoot up again.
Ms Largarde said there was “still a journey ahead of us” despite inflation in the eurozone having fallen to only 2.9pc.
She said: “We will need to remain attentive until we have firm evidence that the conditions are in place for inflation to return sustainably to our goal.”