Bank of England Governor Andrew Bailey has indicated that the central bank is in no hurry to raise interest rates, given the uncertainty surrounding the Iran war and the UK's weak economic growth. Speaking at a conference in Reykjavik, Bailey said it was tolerable for inflation to remain above the 2% target temporarily, as long as the real economy remains soft and the scale of the shock is uncertain.
Bailey noted that borrowing costs for homeowners and businesses have already risen without the Bank adjusting its base rate, effectively tightening policy. He pointed to a 1 percentage point increase in the cost of new five-year fixed-rate mortgages since the conflict began, as lenders reversed expectations of rate cuts. The housing market has been dampened as a result.
The governor also highlighted that hedge funds and other financial institutions have increased borrowing rates, and the UK bond market has responded with rising yields. This has raised the cost of financing the government's £3 trillion debt, though Bailey said this trend has eased in recent weeks.
Financial markets now forecast a 0.25 percentage point rate rise to 4% before December, a reversal from earlier expectations of two cuts this year. Bailey stressed that the Bank would monitor the situation closely and adjust policy as required, but that tolerance for above-target inflation would weaken if signs of second-round effects emerge.
Bailey added that the Bank is better prepared than after the Russian invasion of Ukraine to assess the impact of rising energy costs, using scenario planning to avoid a repeat of the previous inflation surge without swift action.
