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Bank of England Governor Andrew Bailey on Wednesday moved to ‘caution against’ speculating over the future path of the UK central bank’s key interest rate, as the fight against sticky inflationary pressure continues.
In a speech on Wednesday, Bailey said ‘nothing is decided’ as far as interest rates go.
‘At this stage, I would caution against suggesting either that we are done with increasing bank rate, or that we will inevitably need to do more. Some further increase in bank rate may turn out to be appropriate, but nothing is decided. The incoming data will add to the overall picture of the economy and the outlook for inflation, and that will inform our policy decisions,’ Bailey said.
Last month, the BoE lifted bank rate by 50 basis points to 4.00% from 3.50%. It next decides on interest rates on March 23.
Bailey’s speech centred on the cost of living crisis gripping the UK.
On Monday, UK government regulator for electricity Ofgem said it would lower its energy price cap from the current £4,279 per year to £3,280 for the average household, effective from April 1.
The regulator said the reduction of almost £1,000 reflects recent falls in wholesale energy prices.
However, domestic energy bills are still set to rise by an average of £500 a year despite the reduction as the government’s support for households tapers.
Bailey said on Wednesday: ‘Looking ahead, with the announced adjustment to the energy price guarantee, the typical energy price bill is set to rise further to £3,000 in April. But to calculate the annual inflation rate at that point, we have to compare with the April 2022 bill, which had already risen significantly. Because of this base effect, even if the bill itself goes up to a higher level, it goes up by less over a year than it did in October. The annual inflation rate therefore falls sharply from 96% to 52%. The contribution to consumer price inflation from the energy bill will nearly halve.’
Energy bills will still be at robust levels, however, Bailey said, and the outlook for 2024 is ‘uncertain’.
The BoE governor added: ‘Wholesale energy prices have come down markedly over the past few months. If they develop as futures prices now suggest, it is likely that Ofgem’s energy price cap will fall below the energy price guarantee. The numbers shown here are guesstimates, but they illustrate that we might expect household energy bills to start falling. This means that annual inflation in the typical bill will eventually turn negative as the bill drops below what it was a year earlier. Energy bills will start to drag directly on overall annual consumer price inflation.
‘But as you can see, this does not mean that we should expect household energy bills to come down to previous levels any time soon. And from a cost-of living perspective, it is the level of what people have to pay that matters. There will be some relief, but energy bills will remain a challenge for many people, particularly for those on lower incomes.’
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