Bank of England Governor Andrew Bailey stated on Wednesday that a rise in market interest rates since the onset of the Iran conflict has afforded the central bank more time to assess its economic ramifications. Higher mortgage borrowing costs serve as a prime example of how investors have adjusted their positions since the hostilities began, Bailey told lawmakers. Unlike the European Central Bank, which has hinted at a potential rate hike next month, the Bank of England had been widely expected to cut rates this year before the closure of the Strait of Hormuz altered the inflation outlook. The Bank of England, the central bank of the United Kingdom, is responsible for maintaining monetary and financial stability. It sets the nation’s benchmark interest rate to control inflation and influence economic activity.
Bailey was part of an 8-1 majority on the BoE’s Monetary Policy Committee (MPC) that voted to keep the benchmark rate on hold in late April. The MPC stated its response to the energy shock would depend on its scale, duration, and economic transmission. Higher market rates, which currently price in at least two quarter-point BoE rises this year, are already exerting some downward pressure on inflation, at least temporarily. Bailey observed a softening outlook for economic growth and the labour market, with wage settlements gradually easing, though trends remain uncertain.
He also noted that market pricing for energy appeared “fairly benign” despite damage to Middle East gas infrastructure, which could take over a year to repair, suggesting potential underestimation of inflation risks. Other MPC members presented differing views at the same hearing. External member Swati Dhingra suggested rate hikes might be avoided if moderate second-round energy price effects materialise. Conversely, Catherine Mann warned persistent high inflation into late 2026 could embed in 2027 wage deals, noting higher market rates’ impact. A recent Reuters poll indicated a narrow majority of economists did not expect the BoE to raise rates this year, though more than a third forecast at least one increase.
