LONDON, Feb 20 (Reuters) -
Bank of England Governor Andrew Bailey said bets by investors on interest rate cuts this year were not unreasonable but he also pointed to clear signs of an upturn in Britain's economy after it fell into recession at the end of last year.
"The market is essentially embodying in the curve that we will reduce interest rates during the course of this year," Bailey told lawmakers on the Treasury Select Committee.
"We do not endorse the market curve. We are not making a prediction of when or by how much (we will cut rates)," he said before adding: "it's not unreasonable for the market to think about" reductions in borrowing costs.
But Bailey also focused on signs - including strong employment figures - that Britain's economy was stronger than might be suggested by data published last week that showed it fell into a shallow recession in the second half of 2023.
While a 0.3% contraction in the economy in the fourth quarter was a worse performance than the BoE had expected, Bailey said there were reasons for optimism.
"We think the economy is already actually showing distinct signs of an upturn," Bailey said.
"There was a lot of emphasis again on this point about the recession, and not as much emphasis on ... the fact that there is a strong story, particularly on the labour market, actually also on household incomes," he said.
British government bond yields fell as Bailey and his colleagues spoke, suggesting investors were adding to their bets on the BoE cutting borrowing costs.
Deputy Governor Ben Broadbent said it was possible that the BoE would cut rates this year, although that would depend on how the economy evolves.
Swati Dhingra, an external member of the Monetary Policy Committee, described substantial risks to Britain's economy that tight monetary policy would only exacerbate. (Reporting by David Milliken, Suban Abdulla; writing by Andy Bruce; editing by William Schomberg)
