Bank of England Signals Tolerance for Above‑Target Inflation

Bank of England Governor Andrew Bailey has signaled the central bank is prepared to tolerate inflation above its 2% target for a period, prioritizing economic stability over immediate interest rate hikes amid uncertainty from the ongoing conflict in the Middle East and weak domestic growth. Bailey made the remarks in a speech at a conference in Reykjavik, Iceland.

The governor stated that given the current context of economic softness and uncertainty surrounding the scale and duration of the shock from the Iran war, tolerating temporarily above-target inflation to support the real economy is an appropriate approach. He emphasized, however, that this tolerance would weaken if signs of more permanent, second-round effects begin to emerge, such as higher prices feeding into wage demands and broader consumer expectations.

The Bank’s Monetary Policy Committee voted 8-1 to hold the Bank Rate steady at 3.75% at its most recent meeting on April 30. Officials are waiting to assess the economic impact of the conflict, which has disrupted energy markets and global supply chains. Inflation, measured by the consumer price index, was 3.3% in March and is projected to climb higher if energy...