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Speaker 1: The BOE raised its benchmark lending rate a quarter point

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Speaker 1: to five point twenty five percent earlier on Thursday, warning

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Speaker 1: that households and businesses should expect high borrowing costs to

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Speaker 1: linger for the foreseeable future. For more, Bloomberg's Francine Lackwise

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Speaker 1: spoke with Bank of England Governor Andrew Bailey.

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Speaker 2: Could you actually explain in plain English to normal people

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Speaker 2: what you mean by policy will remain sufficiently restrict restrictive

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Speaker 2: for sufficiently long.

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Speaker 3: So the first thing to say is we do see

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Speaker 3: policy now as restrictive and interesting. I think the Federal

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Speaker 3: Reserve and the ECB have said something somewhere in the

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Speaker 3: last couple in last week or so actually, which means

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Speaker 3: that we do see policy acting to bring inflation down.

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Speaker 3: It's having the effect that we will now, and of

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Speaker 3: course there's a lag in the transmission of policy, so

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Speaker 3: it's not a surprise that we've had to wait for

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Speaker 3: a while so this to happen. We see the evidence now,

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Speaker 3: so that gives us a sort of basis for not

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Speaker 3: saying what's going to happen here, And what we're really

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Speaker 3: saying is, look, it's going to have to remain restricted

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Speaker 3: to have this effect of bringing inflation down, and particularly

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Speaker 3: next year, a lot of this year we're going to

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Speaker 3: see inflation come down rapidly, but that's a lot of

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Speaker 3: that is the unwinding of things that happened last year,

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Speaker 3: energy and so on. It's it's it's the last mile,

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Speaker 3: if you like, I use the sort of term sort

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Speaker 3: of a bit lesly. It's the last mile, which obviously

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Speaker 3: where policy is really doing the work, and we're going

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Speaker 3: to have to see policy stay restrictive. Now, the question

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Speaker 3: that is for how long?

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Speaker 4: Right, that's a question I'm.

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Speaker 3: Afraid the answer is because we don't know at the moment.

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Speaker 3: That's why we say for sufficiently long to have its effect,

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Speaker 3: because it's too soon to judge really how long that's

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Speaker 3: going to take. And the reason is that, I think

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Speaker 3: because we've now you know, I think I'm much more

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Speaker 3: confident now that it's on the downslope. But of course

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Speaker 3: people want to see that, they want to really believe it,

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Speaker 3: they want to build it, and then it gets built

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Speaker 3: into people's expectations, it gets built into price setting, it

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Speaker 3: gets built into wage setting. We've got to see that happen.

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Speaker 2: But Governor, so do you believe it could you say, actually,

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Speaker 2: you're victorious right now.

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Speaker 3: No, I'm not going to say victorious. That's that's that

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Speaker 3: would be. I think you know far too soon to

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Speaker 3: say that. What I see is much more solid evidence

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Speaker 3: that's coming down. We've been in a way, we've been

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Speaker 3: in the number we had a couple of weeks ago.

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Speaker 3: We've been waiting for this number for some time because

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Speaker 3: there are a number of puzzles to us in the

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Speaker 3: in the inflation numbers which just didn't seem to really

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Speaker 3: reconcile with what we were hearing. And this gave us

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Speaker 3: more confidence that we're seeing it.

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Speaker 2: But why put that wording in the guidance? What are

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Speaker 2: you worrying about?

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Speaker 3: Well, I think what we're saying to it too. There's

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Speaker 3: a path in the market where our rates go up

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Speaker 3: and then they come down. There's another path, which we

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Speaker 3: laid out today for illustration, where what happens if you

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Speaker 3: keep put rates essentially where they are today, and that's

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Speaker 3: interestingly both of them return inflation to target. And there's

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Speaker 3: no doubt some other parts we could draw on a

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Speaker 3: piece of paper to get the same effect. What we

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Speaker 3: wanted to say is, look, before we get to the

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Speaker 3: point when we can really say we're confidence, you know,

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Speaker 3: this is this is getting behind us. We can start

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Speaker 3: to you know, to maybe bring rates down. We've got

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Speaker 3: to see a lot more evidence, so they will have

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Speaker 3: to stay, you know, policy will have to stay restrictive

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Speaker 3: fisher period of time to get to that point.

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Speaker 4: But is this a new normal in terms of interest rates?

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Speaker 3: Oh? The current level?

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Speaker 2: Yeah, the current level more or less. Like will we

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Speaker 2: ever go back to what we had in the last

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Speaker 2: ten years?

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Speaker 3: Well, I would be surprised if we go back to

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Speaker 3: near zero interest rates. I think something's going to have

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Speaker 3: to happen that we currently don't know about. I think

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Speaker 3: if you do all the work that's done on sort

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Speaker 3: of equilibrium rates where it might the rates settle, that

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Speaker 3: would suggest it's lower than it is today as a

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Speaker 3: sustainable rate, but actually nowhere near down to where we

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Speaker 3: were in the sort of the period post the financial crisis.

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Speaker 3: But we're not. That's uncertain that we're not yet there

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Speaker 3: to the point when we can start reaching I think

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Speaker 3: firm vis on.

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Speaker 2: That Governor is the guidance preparing the way for a

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Speaker 2: passive interest rate.

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Speaker 3: We're not there yet. I would say we're going to

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Speaker 3: have to see the evidence as it emerges for the

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Speaker 3: next meeting, So it's not designed to do that, but

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Speaker 3: it is designed to say we're really saying the effects

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Speaker 3: now of policy working, that we're going to have to

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Speaker 3: go on seeing those effects. We think there is a

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Speaker 3: the clear downward path of inflation happening. Those things need

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Speaker 3: to complex now. Unfortunately, of course, as we said in

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Speaker 3: what we issue today, if of course I'm afraid we

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Speaker 3: get news going the other way, then of course we'll

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Speaker 3: have to have afraid respond and rates we have to

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Speaker 3: go up again. So we're not there yet to make

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Speaker 3: a definitive judgment.

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Speaker 2: So by September twenty first, I think we'll have two

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Speaker 2: new cpis and a couple of government reports.

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Speaker 4: What are you expecting those to show?

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Speaker 3: Well, the next one's out two weeks time. We do

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Speaker 3: expect to see a drop in inflation because one of

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Speaker 3: the two remaining annual energy base effects from the government's

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Speaker 3: energy policies comes out, and the July number released in

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Speaker 3: August is the first one. The October number released in November,

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Speaker 3: which we think is going to be a somewhat bigger one,

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Speaker 3: actually will come out. And those two things are pretty

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Speaker 3: firmly baked in so we do expect to see that happen.

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Speaker 3: What we see beyond that, well we'll wait and wait

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Speaker 3: for it.

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Speaker 2: But what would what would give you comfort to actually

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Speaker 2: say that you've you've done the right decision so far.

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Speaker 3: Well, we've said what we're looking at very carefully. We've

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Speaker 3: pointed to three things in the past, and I would

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Speaker 3: continue with those services prices and services inflation because it

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Speaker 3: has a domestic labor content in it, particularly the labor

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Speaker 3: market where we are seeing signs of listening as the

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Speaker 3: lay market, and then pay where it is still as

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Speaker 3: a level I'm afraid, which is not consistent with the

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Speaker 3: inflation target.

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Speaker 2: How do you square mortgage holders that are trying to

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Speaker 2: actually get on the property ladder and go for mortgages

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Speaker 2: that are four years?

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Speaker 4: Does that a worry to you? How much do you

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Speaker 4: look at that?

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Speaker 1: Well, we have.

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Speaker 3: It's a good point to make because we have seen

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Speaker 3: actually for some years now that the term of duration

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Speaker 3: of UK mortgages extend. We're aware that that's one way

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Speaker 3: in which people are in a sense making properties affordable.

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Speaker 3: And I can understand that. I mean, I don't think

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Speaker 3: we should say that it's a bad thing. I think

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Speaker 3: everybody has to obviously judge their lifetime and their ability

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Speaker 3: to pay over their lifetime. But I can understand why

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Speaker 3: people are doing it.

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Speaker 4: But do you take into consideration.

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Speaker 3: Yes, we do, because we have to take into consideration

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Speaker 3: the transmission of Marchy policy and the mortgage market has changed.

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Speaker 3: Now it's not the only I mean sometimes it could

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Speaker 3: be presented as the only part of Monrtari transmission. It isn't,

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Speaker 3: of course, it's only one part of it actually, but

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Speaker 3: it's become a fixed strate market much more not a

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Speaker 3: US start fixed straight I mean, it's much more limited

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Speaker 3: than that. It's sort of two to five years often,

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Speaker 3: but it's become far more of a fixed rate market.

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Speaker 3: That affects transmission of Marshy policy. And then yes, we

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Speaker 3: do observe that people then take off setting measures, for

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Speaker 3: instance extending the term and we have to factor all

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Speaker 3: of that in.

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Speaker 1: That was Bank of England Governor Andrew Bailey with Bloomberg's

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Speaker 1: Francine Lacua. This is Bloomberg