LONDON, Sept 24 (Reuters) – The Bank of England should be able to cut interest rates gradually as it gains confidence that inflation will remain close to its 2 percent target, Bank of England Governor Andrew Bailey said in an interview published on Tuesday.
Bailey said he was “very encouraged” by the downward trajectory of inflation since it peaked at 11.1% nearly two years ago.
“I think interest rates will come down gradually,” he told the Kent Messenger newspaper.
“Inflation is down a lot,” Bailey added. “We still need to get it sustainably within target and we have a fairly unbalanced mix of inflation components at the moment.”
British inflation was 2.2% in August, but the central bank remains concerned about the high growth rates of prices for services and regular wages, which are rising at an annual rate of more than 5%.
Asked where interest rates would be set, Bailey said he did not expect them to return to the near-zero record lows last seen four years ago and his best guess was that they would be set at a neutral rate that he could not specify.
The Bank of England last week kept its main interest rate at 5%, after cutting it in August from 5.25%, its highest level in 16 years.
Economists polled by Reuters expect the BoE to cut rates to 4.75% at its next meeting in November.
Last week, Bailey sounded optimistic about further rate cuts, but also said cuts would need to be gradual and the BoE needed to “be careful not to cut too quickly, or too much.”
Bailey spoke to the Kent Messenger during a visit to the south-east of England, including the port of Dover, the main route for freight and passenger transport between the UK and mainland Europe.
Asked about the economic impact of Brexit, Bailey said: “What we’ve seen, there will be some short-term painful effect on trade. But in the longer term (…) that trade will be reoriented.”
(Reporting by Sachin Ravikumar; Writing by Sarah Young and David Milliken; Editing by Kylie MacLellan)
