(Bloomberg) -- Bank of England Governor Andrew Bailey said inflation does not need to fall to its 2% target before policymakers back an interest-rate cut and signaled that investors are right to expect a policy pivot this year.

Bailey told Parliament’s Treasury Committee that market bets on rate reductions this year are “not unreasonable.” He said he was “comfortable with a profile that has cuts in it,” but added that when and by how much policy is eased depends on further progress being made on tackling sticky inflation.

“We don’t need obviously inflation to come back to target before we cut interest rates. I must be very clear on that, that’s not necessary,” Bailey said. 

Traders added to their bets on rate cuts after the remarks suggested the central bank is increasingly turning its attention to unwinding its aggressive series of rate rises as inflation subsides. 

Money markets are fully pricing in the first quarter-point reduction by August, with a further two by year-end to take the benchmark rate to 4.5% from a 16-year high of 5.25% currently. On Monday, the chance of a third cut was at 75%.

The shift in rate bets led gilts to outperform peers, with the yield on benchmark 10-year notes falling as much as seven basis points to 4.04%. The pound dropped to the weakest level in one month against the euro.

While inflation is expected to temporarily fall to target in the spring, policymakers are closely watching the jobs market and services inflation for signs of persistent price pressures easing before relaxing their grip. The BOE opened the door to rate cuts in 2024 at its meeting earlier this month and dropped guidance suggested it has a tightening bias, a communications shift Bailey described as decisive.

Bailey said there had been “encouraging signs” on the key indicators in the jobs market and services prices but stressed that policymakers are looking for “sustained progress.”

Bailey did not push back against the market curve during Tuesday’s hearing.

“They think we’re going to cut rates during the rest of this year,” Bailey said. “We do not endorse the market curve. We are not making a prediction of when or by how much but I think you can you can tell from that profile of the forecast — again comparing it with the constant rate forecast — that it’s not unreasonable for the market to think that.”

The Governor also played down the significance of data last week showing the UK fell into a technical recession in the second half of last year. He was questioned about former BOE Chief Economist Andy Haldane’s comments to Bloomberg’s UK Politics podcast in which he warned that the BOE risks deepening the recession unless it moves to rate cuts soon.

Bailey said the figures point to a “very weak recession” and highlighted “distinct signs of an upturn.”

“If you look at recessions going back to the 1970s, this is the weakest by a long way,” he said. Deputy Governor for Monetary Policy Ben Broadbent added that GDP is likely growing again after falling slightly in the third and fourth quarters of 2023, and that firms are hoarding labor in anticipation of a pickup — keeping the labor market tight. 

Other points made during the hearing:

  • Broadbent also endorsed a move to easier monetary policy this year. “In my view that is the more likely direction in which Bank Rate is likely to move,” he said in his annual report released alongside the session. He said it is likely that pay growth will fall further in the coming months, though he said it is not consistent with the inflation target.
  • External rate-setter Swati Dhingra, who sought a rate cut this month, warned against the risk of overtight policy resulting in a hard landing for the economy. She said this could damage the “supply capacity in a more long-lasting way.”
  • Fellow external rate setter Megan Greene, who dropped her call for higher rates, highlighted the risk of cutting rates too quickly, only to raise them again as inflation is rekindled
  • Bailey said a review into the central bank’s forecasting by former Federal Reserve Chair Ben Bernanke will “probably” be published in April.

--With assistance from Aline Oyamada.

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