Bank of England governor Andrew Bailey has indicated the corner may have been turned on inflation after two monthly falls in the consumer prices index, with a hint that UK interest rates may peak at 4.5%.
Bailey said a fall in UK CPI from 11.1% in October and 10.7% in November to 10.5% last month was “the beginning of a sign that a corner has been turned."
“What we think is the most likely outcome is that [inflation] will fall quite rapidly this year, probably starting in the late spring, and that has a lot to do with energy pricing,” he told the Western Mail.
He also suggested a "long but shallow recession" was likely, and said the Bank was monitory pay levels carefully, with average earnings rising at near record levels albeit still well below the rate of inflation.
Bailey, whose own salary has come under scrutiny – especially after saying last year that people shouldn’t ask for big pay rises to offset soaring household costs, said: “there are some signs that if anything it is still rising a bit, but some of the forward-looking surveys of earnings and pay are not as strong as that actually.”
Market interest rate expectations ahead of Bank's monetary policy committee (MPC) meeting in early February have shifted towards another 50-basis-point hike, up from 25bps, with the base rate currently at 3.5%.
And Bailey suggested the market's view that rates would peak at 4.5% may not unrealistic.
He said: “I am not endorsing 4.5%, but what you may have noticed in December is that we did not include the comment that we made in November about the market being, in our view, rather out of line.”
Earlier this week, Bailey had suggested a shortage of workers in the labour market posed a “major risk to inflation coming down”, with the implication that the MPC could remain more hawkish on policy decisions this year.
This followed jobs market data that showed UK wages rose at their fastest rate since records began, at 6.4%, but that real earnings are still falling thanks to high levels of inflation.