Bank of England Governor Andrew Bailey stated on Tuesday that it is crucial to drive UK inflation back down to the policy target level and to convince the public that the central bank has the capability to achieve this goal.
When asked whether inflation persistently exceeding 2% for much of the 2020s meant the Bank of England needed to reconsider its inflation target framework, Bailey responded, "We need to focus more on managing the path of inflation back to target and ultimately delivering on that target. We must make the public confident that the 2% inflation target is a firm policy anchor."
Bailey made this clear during the annual hearing of the House of Lords Economic Affairs Committee, stating that even if inflation deviates from the target for an extended period, the target would not be raised to 3%.
The UK's Consumer Price Index for April showed a year-on-year decline to 2.8%. Under the baseline scenario of steadily declining energy prices throughout the year, the Bank of England forecasts that inflation will rebound to around 4% by the end of the year.
If energy prices rise further and there is a broad increase in the prices of various goods and services, a more pessimistic scenario, the central bank predicts inflation could exceed 6% by early 2027. However, this would still be significantly lower than the historical peak of over 11% in October 2022.
Bailey admitted, "The current situation is very frustrating. I had expected inflation to be at target by this time this year, and various data previously supported this view. Reality has been different. This episode of above-target inflation has been almost entirely driven by geopolitical events in the Gulf region."
However, data released on Monday provided a positive signal, suggesting that the sustained impact on energy prices from the Middle East conflict may be weaker than the market initially anticipated.
UK public inflation expectations for the coming years, which hit their highest level since 2023 in March, eased somewhat in May but remain above pre-conflict levels.
At the April policy meeting, Bailey joined the majority 8-1 vote to keep the benchmark interest rate unchanged at 3.75%. Last week, he noted that rising market funding rates have given the Bank of England a window to observe and carefully assess whether interest rate hikes are needed to counter inflationary pressures stemming from the Iran conflict.
Tuesday's market trading pricing indicates that investors see about a 90% probability of the Bank of England holding rates steady this month, while betting that the central bank may implement one, or at most two, rate hikes within the year.
Comments