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The Bank of England governor said on Wednesday he had become more concerned about the possibility of weakening demand in the UK economy, a key reason he believed the country was on track for slowing inflation.
While the BoE had predicted consumer prices inflation will accelerate to 3.7 per cent this year from 3 per cent in January, Andrew Bailey told MPs that he believed the “underlying path” of price growth was still going downwards.
He played down the risks of a self-reinforcing acceleration in price growth given the “weakening pattern” of the UK economy, adding: “It is nothing like what we saw a few years ago.”
“The demand weakness argument may be getting a bit stronger relative to last year, but we will see,” Bailey said.
The BoE lowered interest rates to 4.5 per cent in its February meeting even as it warned that rising commodity prices including energy were set to drive inflation higher in the coming months.
A major question facing the central bank is whether recent weakness in the economy is primarily attributable to a weak supply side of the economy or to softening demand, the latter of which could help drag inflation lower.
Speaking to the Treasury select committee, Bailey stressed the increasing risks facing the UK now because of the tariffs being imposed by the US on its partners.
The direct impact on inflation was “ambiguous”, he said, but “the risks to the UK economy — and indeed the world economy — are substantial”.
Huw Pill, the BoE’s chief economist, told the committee it was difficult to assess the results of rising trade tensions on inflation, but said he would not support a more rapid pace of rate cuts given ongoing inflation risks.
“I do not have yet full confidence that we have squeezed all of that out,” he added.
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