Governor Bailey warned that another 25 bps rate increase could be justified if the conflict in Iran does not come to an end. Bailey stressed that the UK needs to limit the inflationary impact of the conflict, particularly given that domestic inflation pressures were already elevated before the energy shock.
However, he pushed back against suggestions that the BoE has acted too late, arguing that the latest decline in oil prices was encouraging but that policymakers cannot place too much weight on short-term developments without clear evidence of a genuine peace process.
He also refused to commit to a “two and done” outlook for interest rates, highlighting the uncertainty surrounding the conflict and noting that he hopes to have greater clarity on its outcome by December.
Bailey also addressed market pricing, noting that the upward shift in the interest rate curve partly reflects higher risk premia rather than expectations of further policy tightening, describing the current pricing as a reasonable reflection of energy-related risks. On the domestic economy, he pointed to stronger-than-expected business investment.
On the inflation outlook, Deputy Governor Dave Ramsden said the downward trend in services price inflation appeared to have slowed or stopped. Lombardelli, meanwhile, noted that consumer-facing businesses were reporting less pricing power than business-to-business companies. She added that public-sector wages did not represent a particular inflation risk and that the latest minimum wage increase was broadly in line with, or below, expectations.
Overall, the BoE is reluctant to adopt a stronger hawkish stance, so the December meeting will depend heavily on developments in the US-Iran conflict, energy prices and evidence of second-round inflation effects in the economic data. The British pound spiked on the surprise 9-0 vote split, but gave back most of the gains on underwhelming commentary.
This article was written by Giuseppe Dellamotta at investinglive.com.