Bank of England Governor Andrew Bailey said on Friday in Oxford that the likelihood of an interest rate hike would increase if the price shock caused by the Iran conflict persists.
Since the outbreak of the conflict, the Bank of England has consistently voted to keep rates unchanged, but Bailey stated that the longer energy prices remain elevated, "the harder it becomes to maintain that stance." Policymakers cannot wait for conclusive evidence of second-round effects before raising rates. "By the time we see that evidence, it will be too late," Bailey said during a panel discussion at an event hosted by the University of Oxford and the Federal Reserve Bank of New York.
Turning to financial conditions, Bailey noted, "Conditions have already tightened, and we must take that into account."
"The reality is that we are in an era of frequent major supply shocks, most of which are negative," he said, specifically pointing to artificial intelligence as a potential positive supply shock. "The test is not whether we can predict these shocks, but how we respond and how we bring inflation back to target."
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