By Paul Hannon
The Bank of England has effectively tightened its monetary policy by not cutting its key interest rate, and consequently has time to assess the economic impact of the conflict in the Middle East before deciding on its next move, Gov. Andrew Bailey said Wednesday.
In late April, the BOE left its key interest rate at 3.75%. Speaking to lawmakers, Bailey said that at the start of this year it was "reasonable" to expect one or two cuts.
But as a result of the jump in energy prices that has accompanied the conflict, cuts are no longer possible.
"If you start there, then effectively we've tightened policy by removing the expectation of a cut," Bailey said. "That tightening gives us some time to assess."
Bailey's comments suggest he is unlikely to support a rise in the key rate at the June meeting of the Monetary Policy Committee.
The change in investor expectations about the BOE's rate path has led to a sharp rise in yields on U.K. government bonds. That in turn has raised the cost of borrowing for households and businesses, and is already acting as a restraint on the economy that should help cool inflation.
Also speaking to lawmakers, other members of the MPC said the tightening in financial conditions makes it less likely that the BOE will need to raise its key rate unless energy prices rise even higher and for longer.
Officials worry that the rise in energy costs could lead to higher wage demands from workers, and price hikes by businesses seeking to match increased costs. Central bankers refer to those sorts of price increases as "second round effects."
"In a world where we are trying to offset second-round effects, we have had sufficient tightening to be able to offset the current risk of second-round effects," said Sarah Breeden, a deputy governor at the BOE.
That view was shared by Swati Dhingra, a member of the MPC who typically favors lower interest rates than some of her colleagues.
"There is a lot of tightening already in the system," she said. "We should be able to control inflation."
But the rise in bond yields may also affect the voting behavior of Catherine L. Mann, who has in the past tended to favor higher interest rates.
"Financial conditions have tightened," she said. "We have to take that into account."
Write to Paul Hannon at paul.hannon@wsj.com
(END) Dow Jones Newswires
May 20, 2026 09:56 ET (13:56 GMT)
Copyright (c) 2026 Dow Jones & Company, Inc.
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