The Governor of the Bank of England, speaking on a visit to South Wales, spoke yesterday of his belief that inflation will have fallen significantly from the Spring, although he feels that the continued tightness of the labour market will lead to the Central bank needing to continue to hike the base rate which currently stands at 3.5%.

He refused to speculate on where rates will be when the Bank feels confident to pause the current cycle of interest rates rises.

The feeling in the financial markets is that rates will reach at least 4.5% before the bank ends the current phase. As in the U.S. and the Eurozone, rates have been at historically low levels for a considerable time, and this means that finding the neutral level may be difficult.

There is no scientific method of predicting when rates have reached a point where they are no longer accommodative. However, a combination of falling inflation and rising unemployment, coupled with a downturn in economic activity, will guide the Bank.

Bailey went on to say that he expects the economy to suffer a recession from the current quarter. He feels that it will be shallower than on previous occasions, but will last longer than is what is considered normal.

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