At a Friday event in Oxford, Andrew Bailey warned that keeping rates on hold becomes harder the longer oil and gas stay expensive. "It's going to get harder to maintain that stance the longer we have high energy prices for," he said. He added that policymakers "can't, as monetary policymakers, wait to get the full evidence on the second-round effects to make that call because it's going to be too late." Bailey also noted, "There's no question that we're seeing the first-round effects," and described the pass-through so far as "quite subdued," while emphasizing it is still early.
Last week, the Bank of England kept rates at 3.75% after a 6-3 vote in favor of holding steady. The committee signaled it could soon follow the Federal Reserve and European Central Bank by raising borrowing costs. Concern is building on the MPC about the US-Iran war dragging on, and on Thursday Deputy Governors Clare Lombardelli and Sarah Breeden indicated they are moving toward supporting a hike. Given the current division on the committee, if Bailey and his deputies switch sides, that would provide the votes to raise rates in November.
Traders put the odds of a quarter-point hike at nearly 90% and see at least three additional moves in the coming 12 months. With oil above $100 a barrel, auto fuel is getting pricier, and industrial energy costs are soaring. For households, gas and electricity charges are poised to climb by around one-quarter when January's price cap update takes effect, a rise expected to lift CPI inflation to above 4% in 2027.
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Policymakers reckon financial conditions have tightened markedly since the Middle Eastern conflict started, giving them a window to observe whether companies respond by hiking prices. A sluggish UK labor market should restrain employees' leverage, and better insight into 2027 pay settlements isn't expected until later this year. For household budgets, the near-term signal is straightforward: if energy stays high and inflation risks broaden, policymakers say it will get tougher to resist raising rates.
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