Bank of England's Bailey: 'More restrictive policy' could still be needed due to labor market shocks

Bank of England Governor Andrew Bailey will hail the progress made in dampening inflation in the U.K. in a Friday speech, but also caution that monetary policy may need to remain restrictive for longer than expected due to shocks from the labor market.

Headline inflation has "fallen sharply as energy and food price shocks in particular have fallen away," while higher rates have helped tackle so-called second round effects such as wage growth and price-setting, Bailey is expected to say in a speech at the U.S. Federal Reserve's central bank symposium in Jackson Hole, Wyoming.

Headline price rises in the U.K. hit the BOE's 2% target for two months this year, before rising to 2.2% in July.

Risks to persistent inflation are lower than they were a year ago, Bailey will say, adding that he currently places more weight on a scenario in which "the persistence is essentially self-correcting with the degree of restriction we have in place today easing off over time."

However, he will caution that two less "benign" scenarios remain possible that will require the Bank of England to "maintain restriction for longer."

These scenarios "would suggest that there are structural changes in product and labor markets going on which are causing the supply side of the economy to change as a lasting legacy of the major shocks we have experienced," he is expected to say.

It comes after Federal Reserve Chair Jerome Powell on Friday gave his firmest comments yet indicating that interest rate cuts lie ahead for the world's biggest central bank, stating: "The time has come for policy to adjust."

BOE policymakers have repeatedly flagged concerns over the rate of U.K. wage growth and tightness in the jobs market. Meanwhile, inflation in services, the U.K.'s