Bởi Maksym Misichenko · The Guardian ·
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The panel agrees that the BoE will maintain the 3.75% rate through summer, tolerating above-2% inflation, but warns of potential second-round effects from energy shocks and sticky wages that could force earlier tightening. They express concern about the UK economy's vulnerability to a sharp contraction if credit conditions tighten too rapidly.
Rủi ro: Second-round effects from energy shocks and sticky wages forcing earlier tightening than markets price.
Cơ hội: None identified.
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The Bank of England is in no rush to raise interest rates while the outcome of the Iran war remains uncertain and the UK’s growth rate stays weak, the governor, Andrew Bailey, said.
In a signal that borrowing costs will remain at 3.75% at least during the summer, Bailey said it was tolerable for inflation to stay above the Bank’s 2% target during the current crisis. However, that would change if a more permanent increase in prices began to take effect.
“Given the context of softness in the real economy and uncertainty around the scale and duration of the shock, tolerating temporarily above-target inflation to provide some support for the real economy is an appropriate way to approach the trade-off [between inflation and activity].
“But that tolerance would weaken if signs of second-round effects begin to emerge,” he said.
At the start of the year financial markets had expected the Bank to cut interest rates twice this year to 3.25%. Since the Iran war began, the situation has reversed, and now a rise of 0.25 percentage points to 4% before December is forecast.
Speaking at a conference in Reykjavik organised by Iceland’s central bank, the governor said the economic situation had deteriorated since the start of the bombing of Iran by the US and Israel.
“We have to monitor the situation in the Middle East and how it affects the UK economy and inflation very closely and adjust policy as required,” Bailey said.
Central banks across the world have struggled to cope with the shock increases in energy costs sparked by the Iran war.
The Federal Reserve, under pressure from the US president, Donald Trump, was expected to reduce interest rates this year but is now forecast to hold them steady after the new Fed chair, Kevin Warsh, took the helm on 22 May.
Policymakers at the European Central Bank have signalled a likely rate rise in June after it cut rates by more than the Bank of England before the Middle East conflict.
Bailey said that one reason the Bank was prepared to wait was that borrowing costs had risen for homeowners and businesses without the central bank needing to adjust interest rates.
He said mortgage costs had increased since hostilities broke out as lenders reversed their expectations of rate cuts, dampening the housing market.
Hedge funds and other financial institutions that lend money to businesses had also increased borrowing rates.
“We have, in effect, tightened policy in my view. I was quite clear that I thought we probably would cut rates once or twice this year. That’s off the table.
“So we’ve had about a 1 percentage point increase in the cost of new five-year fixed-rate mortgages. And that is obviously a tightening of financial conditions.”
Rising borrowing costs had also increased the cost of financing the government’s £2tn debt load, although Bailey said that in recent weeks this trend had eased.
He said there was a hangover from the inflation increase in 2022 after the Russian invasion of Ukraine, which sent inflation soaring into double figures.
However, he said the central bank was better prepared now to assess the likely impact of rising energy costs on the economy and inflation after adopting scenario planning.
The Bank now highlights the wide range of factors that could turn a temporary increase in inflation into something more permanent. So it was unlikely to allow a repeat of the previous inflation increase without taking swift action, Bailey said.
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"BoE patience amid war uncertainty masks rising borrowing costs that will weigh on UK growth and asset prices more than the dovish rhetoric suggests."
Bailey signals the BoE will hold the 3.75% rate through summer, tolerating above-2% inflation to cushion weak growth and Iran war shocks, while markets have flipped from expecting two cuts to pricing a 25bp hike to 4% by December. Effective tightening has already occurred via 1pp higher five-year mortgage rates and wider corporate borrowing spreads without BoE action. The governor cites better scenario planning than in 2022 but warns second-round effects would end the tolerance. This leaves UK policy reactive to Middle East energy price spikes and domestic softness rather than proactive.
Persistent energy cost shocks could embed inflation faster than the BoE's current models anticipate, forcing an earlier or larger hike than the 4% December market forecast and amplifying the growth drag already visible in housing data.
"Bailey is buying time before hiking to 4%, not genuinely pausing—the 100bps of market-driven tightening already priced in suggests real rates are rising even as he talks patience, which is recessionary for UK equities and supportive for sterling."
Bailey is signaling a hold at 3.75% through summer, but the article obscures a critical contradiction: he admits policy has already tightened ~100bps through market repricing of mortgages and corporate lending, yet inflation remains above target. The 'tolerance' for above-2% inflation is conditional on no second-round effects—but wage growth data (not mentioned here) will be the real test. The shift from expected rate cuts to a potential 4% by December is massive, yet framed as patient. This isn't dovish; it's a pause before hiking. GBP strength and gilt yields may have further to run if energy shock proves transitory.
If the Iran conflict de-escalates sharply in coming weeks, Bailey's entire 'wait and see' framework collapses, and the BoE looks behind the curve on inflation—forcing aggressive tightening that crashes growth and sterling. The article assumes the shock persists; it may not.
"The Bank of England is effectively abdicating its role by allowing market-driven credit tightening to substitute for formal policy, increasing the risk of a policy-induced recession."
Bailey’s 'wait-and-see' approach is a tactical retreat, not a strategic pivot. By acknowledging that market-driven tightening—specifically the 100bps rise in 5-year fixed mortgage rates—has done the Bank of England's job for them, he is effectively outsourcing monetary policy to the bond market. This creates a dangerous feedback loop: if the geopolitical risk premium in energy prices spikes further, the BoE risks being trapped in a stagflationary quagmire where they cannot cut to save growth without de-anchoring inflation expectations. The reliance on 'scenario planning' suggests a lack of conviction, leaving the UK economy vulnerable to a sharp contraction if credit conditions tighten too rapidly.
Bailey’s 'do-nothing' stance might actually be the optimal path, as it avoids a policy error that could trigger a recession while allowing the market to naturally price in the risk of a prolonged Middle East conflict.
"Second-round inflation risks from energy and wage dynamics could force an earlier-than-expected BoE tighten, despite today’s talk of a summer hold."
Bailey signals a summer pause with tolerance for above-target inflation, but the big risk is second-round effects from energy shocks and sticky wages, which could force earlier tightening than markets price. The piece omits the risk of sterling depreciation feeding imported inflation and further mortgage-rate resets if financial conditions tighten beyond the BoE’s patience window. It also treats policy as a near-term call, yet a sustained energy shock or disinflation failure could push inflation persistence higher, potentially lifting the policy rate toward 4% by year-end. Note the article’s Fed claim about Kevin Warsh becoming chair; that seems inaccurate.
The strongest counter is that UK inflation could recede faster than expected if energy prices stabilize and wages cool, keeping the BoE on hold longer and reducing the risk of a hawkish surprise.
"Mortgage resets and sterling weakness together could force earlier BoE tightening than markets expect."
Gemini's feedback loop warning overlooks that mortgage rate resets will hit household spending hardest in Q3, not just credit conditions. Connecting this to ChatGPT's sterling risk, a weaker GBP could offset any BoE patience by boosting import costs exactly when wages are negotiated. This interplay risks embedding inflation without needing further energy spikes, forcing BoE's hand earlier than the 4% priced in.
"Wage settlement timing in Q2 is the critical gate; if it passes without inflation premiums, Bailey's patience survives the energy shock."
Grok's Q3 mortgage reset timing is concrete, but the wage-negotiation window he flags actually peaks in Q2—before those resets fully bite. This matters: if wage settlements lock in now without energy-shock premiums, the BoE's 'second-round effects' trigger never fires, and patience holds. The sterling-import feedback loop is real, but it's a 6-month lag, not immediate. The article's silence on Q2 wage data is the actual blind spot here.
"Fiscal drag and demand destruction will neutralize wage-push inflation before the BoE is forced to hike to 4%."
Claude, your focus on Q2 wage settlements is vital, but you're missing the fiscal transmission. The UK’s fiscal drag from frozen tax thresholds means real disposable income is already shrinking, regardless of nominal wage growth. If households prioritize food and energy over discretionary spending, wage-push inflation will be neutralized by demand destruction. The BoE isn't just watching wages; they are waiting for the consumer to break. If consumption craters in Q2, the 4% rate hike becomes a policy error.
"Energy trajectory and sterling dynamics will force a higher terminal rate than markets price, even if wage growth cools."
Claude's wager on wage data as the real test risks underplaying the timeline and transmission lags. Even with softer Q2 wages, an energy shock remains a fuel for second-round persistence via imported inflation and fragile real incomes. If inflation sticks, the BoE may need to surprise to 4% by year-end, not pause. The policy is not simply 'wait and see'—it's a shifting terminal rate that hinges on energy trajectories and sterling dynamics.
The panel agrees that the BoE will maintain the 3.75% rate through summer, tolerating above-2% inflation, but warns of potential second-round effects from energy shocks and sticky wages that could force earlier tightening. They express concern about the UK economy's vulnerability to a sharp contraction if credit conditions tighten too rapidly.
None identified.
Second-round effects from energy shocks and sticky wages forcing earlier tightening than markets price.