Bank of England Governor Andrew Bailey said persistently high energy prices could eventually force the central bank to raise interest rates, reinforcing the Monetary Policy Committee's recent hawkish tilt. He added that broader inflation spillovers remain limited so far, but that policymakers cannot wait for full proof before acting.
Bank of England Governor Andrew Bailey said on Friday that persistently high energy prices could make it harder to keep interest rates unchanged, reinforcing the MPC's recent shift toward a more hawkish stance. Speaking at the Monetary Economics Conference hosted by the University of Oxford, Bailey said: "it's going to get harder to maintain that stance" the longer energy prices stay elevated. He nevertheless described evidence of broader inflation spillovers so far as quite subdued and said it remained early days to judge how strongly higher energy costs would feed through into wider pricing behavior.
BoE cannot wait for full evidence
The more important policy signal was Bailey's warning that the BoE cannot wait for complete evidence that higher energy prices are affecting inflation expectations before acting. That shifts the debate beyond the first-round rise in energy costs toward the risk that a prolonged shock becomes embedded in expectations and broader prices. Bailey voted with the 6-3 majority to keep Bank Rate at 3.75% last week, but he and several deputy governors raised the prospect of a future increase.
Deputies edge toward tightening
Deputy Governors Sarah Breeden and Clare Lombardelli subsequently indicated they were moving closer to supporting higher borrowing costs, while the BoE now expects inflation to rise to slightly above 4% in early 2027.
Markets price a November move
The shift does not mean Bailey has endorsed the full tightening path currently priced by markets. Last week he said the outlook remained too uncertain to judge whether investors were right to expect almost four additional rate hikes over the coming year, and the MPC had not discussed such a path. But his latest remarks make clear that the duration of the energy shock is becoming a key policy variable: the longer prices remain elevated, the harder it becomes to justify looking through them. Still, with markets now assigning roughly an 80% probability to a November hike, Bailey is validating the direction of tightening risk while leaving its timing and scale dependent on how inflation expectations evolve.
Source: ActionForex
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