BoE's Bailey 'comfortable' that markets expect rate cuts

By David Milliken and Suban Abdulla

LONDON (Reuters) -Bank of England Governor Andrew Bailey said on Tuesday he was comfortable with investors betting on interest rate cuts this year but pointed to signs that Britain's economy was picking up after falling into recession in late 2023.

Investors added to bets on a first BoE rate cut in June as Bailey and fellow policymakers spoke. A quarter-point reduction was fully priced in only for August.

The BoE raised Bank Rate to 5.25%, its highest since 2008, in August 2023 as it grappled with surging inflation and has kept it there since despite a sharp slowdown in price growth, saying it is not yet convinced the inflation risk is fully over.

"I am comfortable with a profile that has cuts in it, but that is not to say when or how much," Bailey told lawmakers from parliament's Treasury Committee.

"We do not endorse the market curve. We are not making a prediction of when or by how much (we will cut rates). But... it's not unreasonable for the market to think that," he said.

Sterling slipped to its lowest level against the euro in around a month as he spoke and government bond yields fell.

Bailey repeated that the BoE would not need inflation to be below its 2% target - something it expects to happen temporarily between April and June - at the point at which it cuts rates.

At the start of the month, Bailey said the high level of interest rates was "under review" but that the central bank needed more evidence of reduced medium-term inflation pressure driven by rapid wage growth and big rises in services prices.

Although the central bank expected inflation to fall below target in the short term, its forecasts show it will rise back towards 3% later this year as the impact of lower energy prices fades and underlying inflationary pressures remain.

Bailey also focused on signs - including robust employment figures - that Britain's economy was stronger than might be suggested by data last week that showed it fell into a shallow recession in the second half of 2023.

While a 0.3% contraction in the fourth quarter was worse than the BoE had expected, Bailey said there were reasons for optimism.

"We think the economy is already actually showing distinct signs of an upturn," Bailey said.

"There was a lot of emphasis again on this point about the recession, and not as much emphasis on ... the fact that there is a strong story, particularly on the labour market, actually also on household incomes," he said.

Deputy Governor Ben Broadbent said it was possible the BoE would cut rates this year, although that would depend on how the economy evolved.

Swati Dhingra, an external member of the Monetary Policy Committee, described substantial risks to Britain's economy that tight monetary policy would only exacerbate.

Broadbent and Megan Greene, another external MPC member, said they were reasonably sure that wage growth - a key gauge of domestic inflation pressure - would edge lower in the coming months as inflation cools.

For now, services inflation and wage growth were around twice the level compatible with consumer price inflation remaining at target, Broadbent said.

(Reporting by David Milliken and Suban Abdulla; writing by Andy Bruce; editing by William Schomberg, Bernadette Baum and Ros Russell)