The Deputy Governor of the Bank of England downplays market volatility and supports further interest rate cuts

According to the Zhitong Finance APP, Sarah Breeden, Deputy Governor of the Bank of England, downplayed the surge in UK government bond yields this week and expressed a willingness to further cut interest rates. After delivering a speech on Thursday, Sarah Breeden stated that the sharp rise in borrowing costs and the decline of the pound were the result of "orderly" market fluctuations, reflecting global factors that also affect US and European bonds.

Sarah Breeden said, "This is to be expected, as the market reacts to news regarding the fiscal outlook." Her remarks indicate that the Bank of England is reluctant to intervene in the market, as it did in 2022 when UK bonds and the pound plummeted following then-Prime Minister Liz Truss's announcement of a "mini-budget." She added, "We will continue to monitor this area."

This week, market expectations for monetary easing by the Bank of England have decreased, but Sarah Breeden noted that there are "preliminary" signs indicating that economic activity is weakening and predicted that the hot wage growth will cool down. She stated in her speech, "Recent evidence further supports the case for removing policy restrictions. I expect that we will continue to gradually remove restrictions over time."

These comments suggest that Sarah Breeden is willing to support another interest rate cut at the Bank of England's February policy meeting, despite concerns about recent financial market turbulence and persistent price pressures in the labor market. It is worth mentioning that Sarah Breeden is the Deputy Governor responsible for financial stability and rarely speaks directly on inflation and monetary policy.

Catherine Mann, a member of the Bank of England's Monetary Policy Committee, also pointed out that the weak labor market is a long-term issue for the UK. She noted that work-age illness and early retirement among the 50 to 65 age group are hindering the UK's growth potential. She stated, "The potential drivers on the supply side of the economy are weak, which is a factor I must consider when judging the appropriate policy setting." Supply shortages make the economy more susceptible to inflation.

Catherine Mann is one of the most hawkish members among the nine members of the Monetary Policy Committee. She voted to accelerate interest rate hikes during the inflation shock and later opposed the interest rate cut decisions in August and November of last year. At last month's policy meeting, she voted with the majority to keep the interest rate unchanged at 4.75%, but it is believed that this official indicated they are close to adopting a "radical strategy" on interest rates.

Additionally, Sarah Breeden downplayed the threat posed by data released before Christmas. The data showed that UK wage growth increased for the first time in over a year. Sarah Breeden emphasized that the UK economy is likely to stagnate in the second half of 2024. She stated, "I expect the impacts of past shocks to continue to fade, as lower overall inflation gradually translates into lower wage growth. There is now some preliminary evidence that economic activity is beginning to weaken, although we expect it to rebound again."

Sarah Breeden also assessed that employers may pass on the £26 billion (approximately $32 billion) increase in wage taxes imposed by the Labour government by lowering wage growth, rather than through price increases, declining profit margins, or unemployment