By David Milliken and William Schomberg
LONDON, May 20 (Reuters) – A rise in market interest rates since the start of the Iran war has given the Bank of England more time to assess the economic impact of the conflict, Governor Andrew Bailey said on Wednesday.
Higher mortgage borrowing costs were one example of how investors have shifted since the conflict began, Bailey told lawmakers on parliament’s Treasury Committee.
“That tightening, I think also gives us … some time to assess,” he said.
Unlike the European Central Bank, which has signalled a possible rate rise as soon as next month, the BoE had been expected by investors to cut rates this year before the closure of the Strait of Hormuz upended the inflation outlook.
BOE MPC VOTED 8-1 TO HOLD RATES LAST MONTH
Bailey was part of an 8-1 majority on the BoE’s Monetary Policy Committee that voted to keep the benchmark rate on hold in late April.
At that meeting, the MPC said its response to the energy shock would depend on its scale, duration and how it feeds through the economy.
Higher market rates – which price in at least two quarter-point BoE rises this year – are putting some downward pressure on inflation, at least temporarily.
Bailey said the outlook for economic growth and the labour market had softened, with wage settlements easing gradually, though it may be too early to be certain about pay trends.
He also said market pricing for energy appeared “fairly benign” given damage to Middle East gas infrastructure that could take more than a year to repair, suggesting investors may be underestimating inflation risks.
Other MPC members who also voted to hold rates last month struck differing tones on the outlook at the same hearing.
Swati Dhingra, an external member of the committee, said the BoE might not need to raise rates if its “scenario B” – where higher energy prices have only moderate second-round effects – materialises.
By contrast, fellow external member Catherine Mann warned that high inflation in late 2026 could become embedded in wage deals for 2027. She said weakness in the jobs market was not broad-based, while noting the impact of higher market rates.
A narrow majority of economists polled by Reuters last week said they did not expect the BoE to raise rates this year, though more than a third forecast at least one increase.
(Reporting by David Milliken. Additional reporting by Sarah Young. Writing by William Schomberg. Editing by Mark Potter)
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