Bank of England Governor Andrew Bailey said Thursday that the recent choice to keep the bank rate unchanged should be understood as an "active hold" - a deliberate, conditional pause rather than a passive wait-and-see approach.
At a press conference, Bailey stressed that the decision does not imply rates will remain fixed under all circumstances. He said there is a strong rationale for holding rates now given the unpredictable economic backdrop, but he warned that a prolonged spike in energy prices could necessitate a higher bank rate.
"I can’t give you a cast iron assurance that therefore there will be no increase in bank rate in any scenario," Bailey said, adding that there is "considerable space available to accommodate inflation pressures."
Bailey highlighted that waiting to observe second-round effects in full before taking action would be a mistake, because by then it would likely be too late. He said this judgement - balancing the risk of acting too soon against acting too late - is one the central bank must take at each policy meeting.
Future decisions on interest rates, the governor explained, will hinge on both the magnitude and the duration of any energy price shock. Those elements are themselves shaped by how the conflict in the Middle East develops and by the pass-through of higher energy costs into consumer prices in the United Kingdom.
On the channels through which energy prices can feed into inflation, Bailey singled out food as likely to see the largest indirect impact. He noted that food production and distribution are energy intensive, and therefore rises in energy costs can transmit into higher food prices.
Bailey also described how second-round inflationary effects could emerge if rising inflation expectations prompt stronger wage bargaining by workers. He warned that the current uncertainty is likely to weigh on firms’ investment intentions.
Finally, the governor cautioned that it will take some time before the central bank can get a clear read on pay developments because of the seasonal cycle of pay setting. That timing constraint contributes to the difficulty of assessing when and how to react to any inflationary shock.
Key developments in brief:
- The Bank of England's hold on rates is an "active" decision, conditional on evolving data and risks.
- A prolonged rise in energy prices could push the bank rate higher, depending on size and duration of the shock.
- Indirect inflationary effects are expected to be largest for food; second-round effects could come through wages and weaker investment by firms.