The Bank of England governor said it was too early to judge whether the energy shock is feeding into wider prices, with a split MPC weighing a rise to 4% next month.
Andrew Bailey, governor of the Bank of England, said evidence that the energy price shock is feeding into wider prices and wages has so far been “quite subdued”, but warned it was too early to draw firm conclusions.
Bailey was speaking at a fireside discussion at the Institute of International Finance’s annual membership meeting in Bangkok in the early hours of 16 October, UK time. He described the UK economy as “more resilient than we expected”, and said businesses were focused heavily on cutting costs and on the difficulty of passing higher costs on, according to reports by Reuters, Bloomberg and Central Banking.
The comments land on a divided Monetary Policy Committee. In September the MPC voted by six votes to three to hold Bank Rate at 3.75 per cent, with Megan Greene, Catherine L Mann and Huw Pill backing a 0.25 percentage point rise to 4 per cent, according to the minutes.
Inflation is moving further from target. The ONS’s Consumer Prices Index rose by 3.1 per cent in the 12 months to August, up from 2.9 per cent in July and well above the Bank’s 2 per cent target. Core inflation, which strips out energy, food, alcohol and tobacco, held at 2.6 per cent, while services inflation was unchanged at 3.4 per cent.
The Bank’s September minutes said inflation was likely to rise further, projecting CPI of about 3.75 per cent in Q4 2026 and slightly above 4 per cent in Q1 2027. The committee expects that peak to arrive just as wage settlements are agreed, which is why second-round effects sit at the centre of the debate.
Activity data has given the hawks little reason to back off. The ONS said on 15 October that GDP grew by 0.1 per cent in August and by 0.7 per cent in the three months to August, compared with the previous three months. Bloomberg reported that markets expect a quarter-point rise at the next decision.
For wealth managers and planners, Bailey’s remarks leave the near-term rate path finely balanced. A rise to 4 per cent would lift cash and money market rates again, sharpening the comparison clients draw between cash and invested portfolios, and could add pressure at the short end of the gilt curve. Annuity pricing for clients approaching retirement and the inflation and real return assumptions in cashflow models will also be shaped by whether the Bank’s projection of inflation above 4 per cent early next year holds.
The next tests come quickly. The ONS publishes September’s inflation figures on 21 October, Chancellor John Healey delivers the Budget on 28 October, and the MPC announces its next decision alongside the Monetary Policy Report on 5 November.
