BOE Governor Andrew Bailey Talks Rates, War, Inflation, Markets

Andrew Bailey · Bank of England

A second Bank of England rate hike is probably more likely than not if energy prices stay high.

Bailey says that if there is little progress toward settling the Middle East conflict and energy prices stay where they were, a second rate raise is probably more likely than not. He notes oil prices have fallen more than gas prices in recent days. He also says the markets' expected path implies a risk premium, and that the risks to inflation are on the upside for now. He will shift the view only if there is solid evidence that energy prices are moving in a different direction on a sustained basis. He declines to predict how the market pricing will map through.

“I'm afraid I think the second raise is probably more likely than not.”at 3:54

Andrew Bailey · Bank of England

UK financial conditions have tightened sharply, with mortgage rates among the highest rises in the G7.

Responding to critics who say rates are not restrictive enough, Bailey argues that the right measure is financial conditions. Those have tightened because the Bank expected to cut rates this year before the conflict began, and the conflict moved the yield curve sharply from March. He points to the increase in UK mortgage rates as one of the highest in the G7 as evidence of that tightening.

“The increase in UK mortgage rates is one of the highest in the G7. So financial conditions have tightened.”at 6:33

Andrew Bailey · Bank of England

UK economy is outperforming expectations, led by business services and strong business investment.

Bailey says UK activity this year has been firmer than the Bank expected, which the Bank is pleased about. Looking at the GDP breakdown, the growth is concentrated in business services. Business investment, measured on the other side of the GDP accounts, has also been quite strong. He treats this as a reason to ask why the economy is outperforming before drawing any conclusion about further hikes.

“We've seen firmer activity in The UK economy this year than we had expected.”at 4:53

Andrew Bailey · Bank of England

UK inflation will rise from the energy price cap even if the Middle East conflict de-escalates quickly.

Bailey argues that the rise in inflation the Bank is announcing is already largely locked in. The cause is the way the household energy price cap is calculated, and much of the Q1 figure is already fixed in that calculation. Even with lasting peace, the relief will be smaller than people imagine. He does not expect inflation to reach 5%. The open question is how fast it falls afterward, and whether it passes through into other parts of inflation such as food and broader activity.

“the increase that we are saying today will happen in inflation is quite baked in at this point because of the way that, particularly, the price cap is calculated for household energy costs.”at 7:11

Andrew Bailey · Bank of England

AI investment accounts for about a fifth of UK growth, per Bank staff analysis.

Bailey reports a first-time Bank staff analysis that estimates AI contributed about a fifth of recent UK growth. He links this to the strong business investment figures, since capital deepening is happening to enable AI. He also links it to business services, which is where the growth is concentrated.

“And they think about a fifth of it... there's capital deepening going on to enable AI”at 5:30