Bank of England chief hints interest rates could rise - but says it will not rush to make the 'difficult' decision
The Bank of England faces a 'difficult' decision on interest rates as the Middle East conflict pushes up prices, the Governor has warned.
Andrew Bailey says a 'very big energy shock' will pile pressure on Britons, but that the central bank would not rush to decide on interest rate rises.
While higher oil and gas prices would feed through to prices, other factors make it 'very, very difficult', Bailey told the BBC at the International Monetary Fund (IMF) summit in Washington.
Before the war, the Bank of England was widely expected to lower rates this year amid signs of a softening labour market and inflation starting to fall.
However, the threat of higher prices, prompted by the oil supply shock, saw markets increasingly pricing in rates holding steady or even rising this year.
That also threatens to do more harm than good at a time of weak growth and high unemployment.
'There's really difficult judgments to be made,' he said. 'We're not going to rush to judgments on those things, because there are a lot of uncertainties around this, not just how it's going to play out, but also how it's going to pass through into the UK economy.'
The Bank of England boss has said it faces a 'difficult' decision on interest rates
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The IMF slashed its growth forecast for the UK this year to 0.8 per cent - the biggest downgrade of all G7 nations - as it warned the global economy could face a recession if oil stays above $100 a barrel through next year.
And on Wednesday, the IMF warned central banks should not rush to hike interest rates to head off rising inflation – Bailey said he was taking into account the 'serious advice'.
The Bank's Monetary Policy Committee will meet at the end of this month, with traders expecting interest rates to stay at 3.75 per cent.
At its last meeting, when the BoE held rates, Bailey said the financial markets were getting ahead of themselves in expecting rate hikes.
Economists agree and say conditions in the UK today are different from when Russia invaded Ukraine, which sent energy prices soaring.
In 2022, inflation stood at more than 6 per cent while the Bank rate stood at 0.5 per cent, compared to 3.75 per cent today.
There are concerns, however, that the damage caused by the war is somewhat baked in with higher inflation expected in the second half of the year and slower growth.
Figures published by the ONS today showed an unexpected jump in GDP growth in February, but experts warn that
'Even before the war, we doubted that the economy could enjoy a sustained acceleration,' said Andrew Wishart, senior UK economist at Berenberg.
'Flat employment, decelerating pay growth and a rising personal tax burden were set to reduce real household spending power.
'Now we can add higher energy prices and mortgage interest rates to the list of headwinds.'
He added: 'The new energy price shock means the UK must now endure both weaker growth and higher inflation, postponing bank rate cuts but not derailing them.'
Bailey warns of financial meltdown
In a letter to the IMF's main steering committee, the Bank of England Governor warned of threats to financial stability that chimes with 2008.
Bailey pointed to elevated share prices, stresses in the private credit markets and liqudiity issues.
'Put simply, there is an increased likelihood that multiple vulnerabilities could crystallise at the same time, thereby amplifying the threat to financial stability and the provision of critical financial services,' Bailey said.
It echoes the Bank's comments earlier this month, warning that the Middle East conflict threatened to increase instability in the financial system.
Cautioning against dismissing recent private credit failures, Bailey said there could be 'a wider loss of confidence, reminiscent of the 2008 financial crisis'.
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