Bank of England holds rate stance as Bailey signals no rush on oil-driven inflation
The Bank of England is keeping a cautious policy stance as higher oil prices add to inflation risks in the UK. Governor Andrew Bailey says inflation remains on track to return to the central bank's 2% target, though later than previously hoped.
Highlights
- Bank of England kept rates unchanged at 3.75% following a 7-2 Monetary Policy Committee vote, citing cautious response to oil-driven inflation.
- Governor Andrew Bailey projects UK inflation rising to about 3.2% later this year from 2.8% in May, mainly due to earlier oil price increases.
- BoE strategy diverges from the ECB’s recent rate hike, as Bailey cites higher market borrowing rates and rejects urgency for further monetary tightening.
Policy stance amid rising energy costs
As reported by Reuters, Bailey says the Bank of England is in no rush to react to higher oil prices, arguing that recent moves in bond yields have already tightened financial conditions and given policymakers more time to assess how energy costs feed through to the economy.He says earlier increases in oil prices mean UK inflation is likely to rise to about 3.2% later this year from 2.8% in May. But he adds that oil prices are not now much higher than they were before the Iran war began at the end of February.
Speaking to CNBC in Sintra, Portugal, where he is attending a European Central Bank conference, Bailey reiterates a position he also expressed earlier this month when the BoE's Monetary Policy Committee voted 7-2 to leave interest rates unchanged at 3.75%.
Market implications and policy divergence
The BoE's stance differs from the European Central Bank, which raises rates this month for the first time since 2023. Bailey says Britain has effectively already experienced a rate increase because market borrowing rates have moved higher since the conflict began, after the BoE signaled it no longer expects to cut rates this year.Bailey also rejects concerns from BoE Chief Economist Huw Pill, who voted for a rate rise this month because he feared policymakers were becoming too relaxed about persistent inflation. Bailey says the central bank is not complacent and that current evidence still points to inflation returning to target, although more slowly than expected.
Our earlier article on rising UK household energy arrears explained how unpaid bills have climbed and how Scottish Power proposed ringfencing and securitising part of the debt to limit the yearly hit on bill payers. We noted that under current rules, bad-debt costs are spread across customers, meaning they can meaningfully add to typical household energy bills.
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