The 2% inflation target will be reached by spring

Bank of England Governor Andrew Bailey told CNBC that the UK will hit its 2% inflation target earlier than expected.

The The central bank kept interest rates unchanged to 3.75% on Thursday, in a widely expected move, although its nine-member Monetary Policy Committee (MPC) was split 5-4 on the decision.

Speaking to CNBC’s Ritika Gupta after the announcement, Bailey said the MPC is expected to reach 2% – the BoE’s target level – by the spring, earlier than expected.

“The critical thing now is that she stays there,” Bailey said.

While much is baked into key factors such as falling energy inflation, the debate now centers on what is the optimal level to ensure headline inflation is kept at target levels, he added, adding that some MPC members are expressing concerns about persistent inflation.

Bailey said it was a “focal point of contention” at Thursday’s meeting that led to the 5-4 split.

“I’m encouraged by what we’re seeing, but I’d like to see some more evidence that we’re going to get the things we need in terms of growth – for example service inflation and wage setting – that will take us there sustainably,” he added.

Analysts said the 5-4 vote was closer than expected. Thomas Pugh, chief economist at tax consultancy RSM UK, predicted the next rate cut would take place in April, when inflation will be below 3% and wage growth will have slowed further, adding that the dovish tone in BoE meeting minutes signaled possible further cuts in the second half of the year.

Thursday’s rate decision comes amid renewed uncertainty surrounding the future of Prime Minister Keir Starmer.

Dominic Bunning, head of G10 FX strategy at Nomura, highlighted the increased pressure on Starmer and the attendant risks to the UK’s fiscal path, noting how sterling and long-end gilt yields have shown a negative correlation amid political challenges.

“There are a few potential candidates to replace Starmer, who would be considered more market friendly, as his bias is firmly towards the center rather than the left of the party,” Bunning said.

Bunning added that the new prime minister would likely appoint a new finance minister, “risking a return to negative fiscal sentiment.”

Pugh said the biggest risk to gilt yields now is the potential leadership challenge facing the prime minister. “The odds of Kir Starr not being Prime Minister by the end of the year have increased from around 50% yesterday to 60% today,” he said in a note.

Bailey declined to comment on specific UK political matters, but said the central bank was carefully monitoring the “high level” of global uncertainty.

“The global economy is stronger, frankly, looking back than we thought it would be a year ago, looking forward,” he said.

“Now that doesn’t mean that obviously we won’t navigate through all of this uncertainty around the world unaffected. I think the last year has been less of an impact than we thought. So we looked at it very carefully,” Bailey added.