LONDON — Bank of England Governor Andrew Bailey told CNBC the "warning signs are there" on inflation, but the central bank will need to see further evidence from the labor market before hiking rates.
The Bank surprised markets somewhat by keeping interest rates unchanged on Thursday, with many investors having backed it to become the first major central bank to hike rates since the onset of the coronavirus pandemic.
Bailey had been among the officials striking a hawkish tone in the run up to the November policy meeting, but the Monetary Policy Committee voted 7-2 to hold its benchmark interest rate at its historic low of 0.1%. However, it strongly indicated that rates will have to rise imminently, with markets now expecting a hike at its final meeting of the year in December.
Asked whether Thursday's policy decision had damaged the Bank's credibility, Bailey stressed that his previous remarks that the MPC would have to act on inflation were "conditional" on whether it begins to see medium-term inflation expectations becoming "de-anchored."
"We don't yet see, and we don't see, evidence of that happening, but of course we are in what I might call a sort of very fragile period, in that sense, because we've got inflation going well above target," Bailey told CNBC's Geoff Cutmore shortly after the rate decision.
"The warning signs are there, the bells are ringing, as it were, so we have to watch this carefully, and that's what we're doing."
The MPC also voted 6-3 to continue existing program of U.K. government bond purchases at a target stock of £875 billion ($1.2 trillion).
Bailey said the decision to keep rates at 0.1% was a "close call," adding that the reason policymakers held off was that it hadn't yet seen evidence on the state of the labor market after the end of the country's furlough scheme on Sept. 30. Around 1 million workers were still on the scheme when it ended, which exceeded the Bank's prior expectations.
"Clearly that was quite an important moment in time and shift in the labor market, and we haven't yet seen any data that really give us a clear steer on what has happened post that," he said.
U.K. job vacancies hit a record 1.1 million in the three months to August, while the unemployment rate fell to 4.5%, indicating a tightening of the labor market and potentially higher wage growth.
Investors had been uncertain as to whether the Bank would fire the starting gun on its path toward policy normalization on Thursday, with market data at the beginning of the week indicating that derivatives traders were pricing in a 64% probability of a 15 basis point hike.
British inflation slowed unexpectedly in September, rising 3.1% in annual terms, but analysts expect this to be a brief respite for consumers. August's 3.2% annual climb was the largest increase since records began in 1997, and vastly exceeded the Bank's 2% target.
The Bank now expects inflation to rise further to around 5% in the spring of 2022 before falling back toward its 2% target by late 2023.
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