Bank of England Governor Andrew Bailey has suggested that the central bank can afford to delay interest rate increases, despite rising inflation. Speaking at a gathering of central bank governors in Jackson Hole, Wyoming, Bailey indicated that fears over inflation were being managed and that the focus remained on bringing inflation back to the target rate.
Inflation in the UK has seen an upward trend, rising from 2.6% in June to 2.9% in July, with expectations of it exceeding 3% later in the year. This increase has been partly attributed to rising prices driven by the ongoing conflict in the Middle East. However, Bailey emphasized that so-called 'second-round effects'—where an initial price spike leads to demands for higher wages and further price increases—appeared to be subdued.
"In the UK, so far I think we’re seeing quite subdued second-round effects," Bailey stated, adding that the bank would "do that" in reference to returning inflation to target. He also pointed to a softening labor market in the UK as a factor weighing against inflationary pressures.
Last month, three out of the Bank's nine-member Monetary Policy Committee (MPC) voted to raise interest rates by a quarter of a percentage point to 4%, while the majority voted to maintain the rate at 3.75%. Market participants are anticipating that rates will be held steady at the Bank's upcoming September meeting, though a quarter-point increase is being priced in by the end of the year.
Bailey also addressed the potential impact of decisions made by the U.S. Federal Reserve, stating that the Bank of England would "have to take decisions to do with the UK" regardless of external monetary policy shifts. He noted that the global economic landscape is facing "even greater uncertainty" than usual.
Catherine Mann, an MPC member who recently advocated for a rate hike, argued that raising rates is necessary to combat inflation, even if driven by factors such as increased energy prices, tariffs, and investments in artificial intelligence. Mann highlighted that these price changes for goods and services directly affect consumer purchasing power.