Bank of England governor Andrew Bailey says inflation does not have to hit its 2% target before the central bank begins cutting interest rates.

The governor told the Treasury Committee: “We don’t need inflation to come back to target before we cut interest rates. I must be very clear on that — that’s not necessary.”

Bailey was speaking after the central bank’s Monetary Policy Committee kept interest rates at a 16-year high of 5.25% earlier this month as it targets inflation by slowing the economy. 

Inflation held steady at 4% in the year to January, as higher gas and electricity charges were offset by falls in the prices of furniture, other household goods, and food. 

Bailey told MPs that the MPC was looking for signs that services inflation, currently above 6%, continued to fall.

He also wanted to see evidence that pay is moving towards headline inflation as well as easing across the UK’s tight labour market.

The governor said: “We’ll be looking for sustained progress on those things to reach that judgment about how long this period of restrictive policy needs to be.”

But external MPC member Swati Dhingra also appeared before MPs, and was the only member of the committee to vote for a cut in interest rates at its last meeting.

She said: “Despite the disinflation at play, and despite the fact that there has been some real wage recovery, we’re still seeing consumption very weak and very different from some of the other advanced economies where there has been a bounce back from the pre-pandemic levels.

“Here, we aren’t seeing that, even after January’s retail sales, unfortunately, [retail sales are] about 2.1% lower.

“I think that suggests to me that the downside risks at this point are substantial and, therefore, if we keep monetary policy tight for longer, that would weigh even further on that sort of real relativity.”

The UK fell into a technical recession last week after gross domestic product fell by a larger-than-expected 0.3% between October and December, after it had already contracted by 0.1% between July and September. 

But the governor told MPs that he expected this to be a shallow phase, which would be “weak” by historical standards.

Bailey said: “We think this is going to be a very small recession – we think the economy is already actually showing distinct signs of an upturn.”

“If you look at recessions going back to the 1970s, this is the weakest by a long way.”

In downturns stretching back some fifty years, gross domestic product had fallen by 2.5% and 22% for two quarters in a row, Bailey said.