Bailey: BoE Can "Hold" Above-Target Inflation, But There Are Conditions
Bank of England Governor Andrew Bailey said the central bank can tolerate inflation temporarily above target to support the economy, as long as there are no second-round effects that amplify price pressures. Bailey expressed this view in a speech at the Reykjavik 2026 economic conference on Friday (May 29).
Bailey argued that weakening real economic conditions and uncertainty regarding the scale and duration of the shock make a "temporary tolerance" approach a reasonable way to balance policy trade-offs. However, he emphasized that this tolerance would be reduced if there were signs of second-round effects—such as more persistent wage or price pressures—beginning to form.
He also highlighted the challenge for monetary policy because second-round effects tend to emerge more slowly than direct and indirect impacts. This makes policy judgment difficult: the central bank must decide whether price pressures will subside on their own or persist and require a response.
Bailey said the BoE's decision to hold the policy interest rate (Bank Rate) at 3.75% at its last meeting was an active choice, not simply a "wait and see" one. He added that, with the "market-priced cut" now temporarily sidelined, the BoE's policy is already essentially tighter than expected, and its impact is already beginning to be felt in the economy.
While allowing room for above-target inflation, Bailey also warned of the risk of prolonged price pressures. He argued that if the knock-on effects persist for too long, inflation could remain above target for too long unless monetary policy responds, so the BoE remains ready to adjust course if the situation develops unfavourably. (Arl)
Source: Newsmaker.id
