Andrew Bailey says above-target inflation can be tolerated for now as weak growth complicates the case for tighter monetary policy
The Bank of England has signalled it is in no immediate rush to raise interest rates, as Governor Andrew Bailey warned that uncertainty surrounding the Iran war has made the outlook for inflation and growth unusually difficult to judge.
In remarks that suggest borrowing costs may remain unchanged through the summer, Bailey said the central bank could tolerate inflation staying above its 2% target for the time being, provided the wider economy remains fragile. The message marks a cautious stance from Threadneedle Street at a moment when higher energy costs, geopolitical instability and sluggish domestic growth are pulling monetary policy in opposing directions.
The Bank Rate currently stands at 3.75%, after policymakers opted to hold rates steady while assessing whether the shock from the Middle East conflict will feed into longer-lasting price pressures. Bailey’s comments indicate that the Monetary Policy Committee is reluctant to tighten policy prematurely, particularly while the UK economy shows signs of softness.
The governor’s argument rests on a delicate distinction: temporary inflation caused by external shocks may be tolerable, but persistent inflation driven by wages, expectations or broader price-setting behaviour would demand a tougher response. In central-bank language, those are “second-round effects” — the point at which an initial rise in energy or import prices becomes embedded across the economy.
For households and businesses, the Bank’s position offers some relief from the prospect of an immediate rate rise. Mortgage borrowers, companies with floating-rate debt and consumers already facing elevated costs may take comfort from Bailey’s suggestion that policymakers will not act hastily. But the reprieve is conditional. If inflation proves more durable than expected, the Bank could still be forced to raise rates later in the year.
The Iran war has added a new layer of complexity to Britain’s economic outlook. Higher oil and gas prices risk pushing up transport, utility and production costs, potentially reigniting inflation just as the economy struggles to regain momentum. At the same time, raising interest rates too aggressively could further weaken demand, investment and household spending.
That trade-off leaves the Bank of England in a difficult position. Its mandate requires it to return inflation to 2%, but Bailey’s remarks show a willingness to look through some of the current price pressure if it is judged to be temporary and externally driven. The central bank appears to be prioritising evidence over speed, waiting to see whether the latest inflation shock fades or spreads.
Markets are likely to interpret the comments as a signal that the Bank remains cautious rather than complacent. Policymakers are not abandoning the inflation target, but they are acknowledging that the path back to 2% may be uneven in a period shaped by war, energy volatility and weak growth.
The coming months will be critical. Fresh inflation data, wage figures and growth indicators will determine whether Bailey’s patience is rewarded — or whether the Bank is pushed back toward rate increases to defend its credibility.
For now, the message from the governor is clear: inflation above target is uncomfortable, but in the current economic climate, rushing to raise rates could carry risks of its own.
