Bailey: Inflation Must Return to 2%, Target Won't Be Raised
Bank of England Governor Andrew Bailey reiterated on Tuesday (June 2) that the top priority is returning UK inflation to the 2% target and maintaining public confidence in the central bank's ability to achieve it. At the annual hearing of the House of Lords Economic Affairs Committee, Bailey said the period of above-target inflation throughout the 2020s was not a reason to change the target framework, but rather demanded that the BoE manage the "path back to target" more decisively.
Bailey also rejected the idea of raising the inflation target to 3% as a solution when inflation misses. He argued that the 2% target must remain credible and "real" for households, so the BoE needs to ensure inflation actually returns to the target, not shift the benchmark.
UK consumer inflation fell to 2.8% in April, but the BoE estimates that inflation could approach 4% by the end of 2026, assuming a gradual decline in energy prices. In a worst-case scenario—if energy prices rise again and there is a broader price increase—the Bank of England (BoE) estimates inflation could reach 6% by early 2027, though still well below the peak of more than 11% in October 2022.
Bailey said the current inflation overshoot was “almost entirely” driven by events in the Gulf, and admitted frustration because he had previously estimated that inflation would have been on target had it not been for the energy shock. However, he added that there were early signs that the impact of the Middle East energy shock may not be as severe as feared, as recent data showed public inflation expectations began to soften in May, though still higher than before the conflict.
On the policy front, Bailey voted to hold interest rates at 3.75% in April (an 8-1 majority) and last week said higher market interest rates give the Bank of England (BoE) time to assess whether it needs to raise rates in response to the inflation shock of the Iran war. Markets currently price in about a 90% chance of the BoE holding rates this month, but are starting to price in one to two rate hikes by the end of the year. (Arl)
Source: Newsmaker.id
