BoE Governor Bailey: No evidence of second-round effects; cannot draw too much comfort from this
- We stand ready to adjust our stance as the outlook evolves
- UK economic activity is subdued, and the labour market is soft
- There is little as of yet to suggest higher energy prices are embedded
- While household inflation expectations have fallen, they remain elevated
- Pressures are building more slowly than we thought in April
- I am seeing broader slowing in domestic inflation
- Weak demand is limiting the pass-through of higher costs to prices
- Spare capacity in the job market is likely to reduce workers’ capacity to get pay rises
- The lack of evidence so far does not rule out future second-round effects
- Our overall assessment of second-round effects remains tentative
- If the Middle East conflict persists and we get 2nd-round effects, we will likely need to raise rates
- Current market pricing reflects risk premia rather than central expectations for the bank rate
- The rate curve seems in a reasonable position
- Should attach a lower than usual probability to the BoE’s central scenario
- The central view in the market is that rates will stay on hold
- Do not leave this room thinking that the BoE is edging towards a hike
- We are not talking about an insurance hike
Bank of England Governor Bailey used a notably cautious tone at the press conference after the BoE left interest rates unchanged. Bailey acknowledged that the Monetary Policy Committee continues to monitor the risk of so-called second-round effects from the recent rise in energy prices, but stressed that there is currently little evidence that such dynamics are taking hold. He noted that while policymakers cannot take too much comfort from the data so far, there is little indication that higher energy costs have become embedded in broader pricing behavior across the economy.
The governor pointed to subdued economic activity and a softening labor market as important factors helping to contain inflationary pressures. According to Bailey, broader domestic inflation is slowing, while weak demand is limiting businesses’ ability to pass higher costs on to consumers. He also highlighted growing spare capacity in the labor market, arguing that this is likely to reduce workers’ bargaining power and moderate wage growth over time.
Although Bailey reiterated that the Bank stands ready to adjust policy if the outlook changes, he suggested that inflation pressures are building more slowly than officials expected. Household inflation expectations have declined from previous highs, even if they remain elevated.
The governor nevertheless refused to completely dismiss upside risks. He said the Bank’s assessment of second-round effects remains tentative and warned that a prolonged conflict in the Middle East, coupled with evidence that higher energy costs are feeding into wages and prices, could eventually require tighter monetary policy. However, he stressed that such a scenario remains conditional on future developments rather than a baseline expectation.
Market participants initially interpreted some of Bailey’s remarks about energy-driven inflation risks as maintaining a degree of hawkish optionality. However, the sentiment shifted during the latter part of the press conference when the governor delivered a series of comments that appeared designed to push back against speculation that the Bank is preparing to raise rates.
Bailey stated that current market pricing reflects risk premia rather than the Bank’s central expectations for the policy rate and suggested that the interest-rate curve is in a “reasonable position”. More importantly, he admitted that markets should assign a lower-than-usual probability to the Bank’s central forecast, reflecting the elevated uncertainty surrounding the outlook.
The comments that had the strongest impact on the British pound came near the end of the press conference. Bailey explicitly stated that the market’s central expectation is for rates to remain on hold and followed that by telling reporters: “Do not leave this room thinking that the BoE is edging towards a hike.” He reinforced the message by adding that policymakers are “not talking about an insurance hike”.
By directly challenging expectations of a potential pre-emptive rate hike, Bailey signalled that policymakers remain comfortable waiting for clearer evidence of inflationary spillovers before considering any tightening response.
The British pound weakened following the comments as traders pared back near-term rate hike probabilities.
This article was written by Giuseppe Dellamotta at investinglive.com.