Before the UK interest rate decision, the central bank governor downplays inflation threat: secondary effects remain "relatively mild"
Bank of England (BOE) Governor Andrew Bailey insists that the UK has not yet seen significant second-round inflation effects and remains cautious regarding forward guidance on monetary policy. However, both market pricing and internal disagreements indicate rising policy uncertainty ahead of the September 17 interest rate decision.
In an interview at the Jackson Hole Economic Symposium in the United States on Friday, Bailey stated that the UK labour market has remained persistently weak and second-round inflation effects are quite mild. "I think for now we can continue to observe this situation," he said. This marks his first public comment on monetary policy since the July 30 policy meeting.
Although Bailey’s stance is relatively dovish, market bets on rate hikes have clearly intensified. Traders have now fully priced in a 25 basis point rate hike this year and are betting on another hike in the spring of next year; short-term UK government bonds have also underperformed their US counterparts.
Meanwhile, Committee member Catherine Mann warned at the symposium about potential impacts on UK monetary policy transmission due to US spillover effects and the rising dominance of the US dollar.
Bailey Sticks to Observation Stance, Pushes Back on Rate Hike Expectations
This latest statement by Bailey continues his public comments after the July rate decision. At that time, he supported keeping rates unchanged by a 6–3 majority, and in the subsequent press conference, made it clear: "Please do not leave this room thinking the Bank of England is edging towards a rate hike."
At Jackson Hole, Bailey reiterated this message, pointing out that current second-round inflation effects are "quite mild" and that the labour market has continued to weaken. He also emphasized that the BOE is evaluating policy on a meeting-by-meeting basis and is cautious with forward guidance.
"The problem with forward guidance," Bailey said, "is that it tends to lead to unconditional statements on policy, and that’s where the danger lies." He also cited the views expressed by Federal Reserve Chair Powell at the same event.
Inflation Data and Labour Market Trends Diverge
Currently, stronger inflation data is at the core of rising market expectations for rate hikes. The latest UK CPI shows that inflation has rebounded for the first time since March, with energy price increases driven by the Iran conflict as the main factor.
Consumer confidence surveys indicate that residents' expectations for price increases over the next year rose to 3.9% in August, roughly double the BOE’s target.
At the same time, European Central Bank officials have leaned towards a second rate hike since the conflict began, with eurozone inflation remaining around 3% amid better-than-expected economic growth. The prolonged conflict between the US and Iran is increasing the risk that the global energy shock could evolve into a broader inflation crisis.
However, signals from the UK labour market are diverging significantly from the inflation trend. Firms are laying off staff, job vacancies have fallen to a five-year low, and private sector wage growth continues to slow. Bailey noted that these factors support his cautiously optimistic view on second-round effects, but he also admitted: "I cannot promise this situation will continue."
Committee Member Mann Warns of New Risks from Dollar Dominance
The BOE is not entirely unified. Catherine Mann, a minority committee member who voted for a rate hike in July, warned in an interview at Jackson Hole about spillover effects from the US and subsequently focused on the deeper risk of the rising dominance of the US dollar at the symposium.
"The implication for monetary policy is that the transmission of policy may potentially be weakened," Mann said. She pointed out that geopolitical and institutional erosion of the pound relative to the dollar is making it harder for the BOE to steer the UK economy.
Mann’s stance contrasts sharply with Bailey’s tone, revealing deep divisions within the BOE’s policy committee on the pace of rate hikes and assessment of external risks. As the September 17 decision approaches, market bets on the BOE’s policy path are likely to remain divided.
Disclaimer: The content of this article solely reflects the author's opinion and does not represent the platform in any capacity. This article is not intended to serve as a reference for making investment decisions.
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