Bank of England Governor Andrew Bailey said second-round inflation pressures from soaring energy costs have remained limited so far, although it is too early to determine whether broader price effects will eventually emerge. Speaking at an Institute of International Finance meeting in Bangkok on Friday, Bailey said, “I think it’s too early, but to the extent we’ve seen evidence, so far it’s been quite subdued.” His assessment suggests that the energy shock has yet to generate substantial wider price pressures, even as economists increasingly expect the BoE to raise interest rates in November. Bailey’s caution reflects uncertainty over whether higher energy costs will eventually become embedded in broader inflation.
Bailey pointed to businesses’ limited ability to pass higher energy costs on to customers, suggesting that firms are absorbing some of the pressure through adjustments to their operating expenses. “There’s a very big focus on cost-cutting and a very big focus on the difficulty of passing through (higher energy prices),” he said. Meanwhile, Bailey acknowledged that the UK economy “is actually turning out to be more resilient than we expected it to be.” His remarks followed August’s GDP report, which showed growth of 0.1% mom, supported by a 1.2% increase in manufacturing output despite stagnant services activity. Nevertheless, Bailey described August’s 3.1% inflation rate as “enormously frustrating,” attributing the overshoot of the BoE’s 2% target primarily to the Middle East conflict.
The remarks come as expectations for a November BoE rate hike have strengthened considerably. A Reuters poll conducted between October 12 and 14 found that 54 of 63 economists expect Bank Rate to rise by 25bps from 3.75% to 4.00% next month, a sharp reversal from September’s survey, when approximately 90% anticipated no further tightening this year. Bailey voted with the majority to hold rates in September, while warning that rising risks of second-round inflation could eventually require tighter policy. Although his latest observations suggest that broader price transmission remains subdued, he emphasized that it is too early to reach firm conclusions. He offered no explicit signal on whether he would support a November hike, leaving the policy outlook dependent on how inflation risks develop.
Key Takeaways
- Second-round inflation pressures remain subdued: BoE Governor Andrew Bailey said evidence of broader inflation effects from soaring energy prices has been “quite subdued” so far, although he cautioned that it is too early to draw firm conclusions.
- Businesses struggle to pass on higher costs: Bailey highlighted companies’ strong focus on cost-cutting and difficulties raising prices, suggesting that higher energy expenses have not yet translated into substantial wider price increases.
- UK economy proves more resilient than expected: Bailey acknowledged that economic activity has held up better than anticipated. August GDP grew 0.1% mom, supported by a 1.2% increase in manufacturing output, although services stagnated.
- Inflation remains uncomfortably high: Bailey described August’s 3.1% inflation rate as “enormously frustrating”, attributing the overshoot of the BoE’s 2% target primarily to the Middle East conflict.
- November hike expectations strengthen despite limited spillovers: A Reuters poll showed 54 of 63 economists expect a 25bps hike to 4.00% in November, a sharp shift from September’s survey. However, Bailey offered no explicit indication of his voting intention.
