On an official trip to Wales this week, Bailey told the Western Mail’s Business Live that in the wake of former Chancellor Kwasi Kwarteng’s disastrous mini Budget, markets priced in a “UK risk premium”.
That has receded following the appointment of Jeremy Hunt as Chancellor and Rishi Sunak as Prime Minister.
Bailey said: “We don’t target a particular peak, but what I will say is this. Back in November, and quite unusually for us, we thought the market curve and therefore, the market’s view of what they thought we would do, was out of line with our own thinking.
“The reason was, quite frankly, there was still something which I would call a UK risk premium in there following the events of September and October.”
At the time, markets reeled off the back of Kwarteng’s shock policy plans to take an axe to taxes.
“If you go back to the height of that period, the peak of what the market thought we were going to get to was over six per cent,” Bailey said.
“By the time we did our forecast in November it was 5.2 per cent and it is now down to 4.5 per cent.”
Market expectations ‘no longer out of line’
Bailey refused to “endorse” base rate peaking at 4.5 per cent but hinted that the Monetary Policy Committee (MPC) no longer felt market expectations were “out of line”.
“You may have noticed in December that we did not include the comment we made in November about the market being, in our view, rather out of line,” he said.
Inflation figures published earlier this week showed price rises slowed in December, bringing consumer price inflation down for the second month to 10.5 per cent.
Bailey called it “the beginning of a sign that a corner has been turned”.
Inflation ‘to fall quite rapidly’
The Governor added that the Bank expects inflation to “fall quite rapidly this year, probably starting in the late spring and that has a lot to do with energy pricing”.
He said: “There was a sort of locked in level of energy prices over the winter, but in the last couple of months electricity and gas prices have started to come off quite a lot since the beginning of the winter.
“That isn’t yet feeding through because of the way in which particularly domestic prices are calculated, but it will do and that is encouraging.”
He added: “It does mean there is more optimism now that we are sort of going to get through the next year with an easier path.”
The MPC is next due to meet at the start of February when they are expected to announce another 0.5 per cent rise, taking base rate to four per cent.
