30th Jul 2026 15:33
(Alliance News) - Bank of England Governor Andrew Bailey said the domestic "disinflation process is in place", with eyes now on whether the energy price shock leads to second round effects.
But a trio of voters were in favour of a hike, as the rate-setting Monetary Policy Committee debates whether "it's better to act sooner or to see how this evolves".
The Bank of England on Thursday left interest rates unchanged in a split vote as it weighs the impact on inflation from the Middle East crisis.
The BoE's Monetary Policy Committee voted 6-3 to leave bank rate at 3.75%. The central bank has maintained rates in each of its five meetings this year, with the last change a quarter point cut to 3.75% in December.
BoE Chief Economist Huw Pill and Megan Greene continued to argue for a quarter point rate increase as they did at the June meeting. In July, they were joined by Catherine Mann.
The forecast had been for only two to vote in favour of a hike. In June, the BoE voted 7-2 to leave rates unmoved.
"I think there are some differences of view around whether... it's better to act sooner or to see how this evolves," Governor Andrew Bailey told reporters after the decision. "I think we are in a position where we can sensibly wait to see how this evolves, but I absolutely respect colleagues who take a different view on that."
Despite the vote turning more hawkish, Bailey played down that BoE is setting up a hike.
"Please do not leave this room thinking that the Bank of England is edging towards a hike," he said. "We took a decision today to leave bank rate unchanged, and that is the relevant conclusion."
Ahead of the decision, numbers last week showed UK consumer prices rose by 2.6% in the 12 months to June, easing from 2.8% in May and below the FXStreet-cited forecast of 2.7%.
The BoE sees consumer price inflation hitting 3.2% in the fourth quarter of the year, before easing to 2.1% a year later.
Policymakers also set out a central projection, a milder scenario and an adverse one. The mild scenario sees no new second round effect, and the central projection has "moderate additional second‑round effects". The adverse scenario would see "stronger and more persistent additional second-round effects" materialise.
In the milder scenario, consumer price inflation peaks at 3%, below its central 3.2% projection, while in the adverse on, it hits 4.5%.
Bailey said: "We have to watch very carefully that these direct and indirect effects do not lead to more persistent inflation through second round effects.
"Reassuringly, there are few signs so far that second round effects are generating more broad based inflationary pressures."
The Brent price is back above USD90 a barrel, after dipping at the start of the week. The analysis conducted in the monetary policy report centres on energy futures prices over the 15 working days up to July 20.
"Over this period, front month, Brent Crude, all futures prices average USD78 per barrel, which is below the USD100 average ahead of the April report, but above the USD64 average in the run up to the February report. Within those 15 working days, the prices ranged from close to USD70 a barrel, while a cease fire was in place, to close to USD90 a barrel," Bailey explained.
"In the few days since the cutoff date for our projections, the Brent oil prices spiked to above USD100 before falling back to around USD84 earlier this week. As of this morning it had gone back above USD90. So these, of course, are all significant moves."
The governor continued: "Given this volatility, the size and duration of the energy price shock is a key uncertainty for the outlook for UK inflation. A second key uncertainty is how the shot will transmit through the UK economy. We can already see the direct effect on the forecourts, and we expect off Ofgem's price cap on household utility bills to rise further."
Bailey noted that while there are "few signs so far that second round effects are generating more broad based inflationary pressures", previous inflationary shocks have taught policymakers that "households and businesses more attentive to inflation".
"The lack of evidence so far does not rule out that wage and prices could generate second round effects in the future," he cautioned. "Especially if energy prices remain elevated. As firms tend to make wage settlements by the second quarter of the year, for example, the impact on wage growth may only emerge well into next year."
Bailey noted that the process of UK disinflation "has continued", highlighting that annual service price growth cooled to 3.6% in June from 4.5% in March.
But a divergence between policymakers rests on second round effects, specifically how to act if and when they emerge.
Summarising the thoughts of Greene, Mann and Pill, Thursday's decision statement said: "These members were less reassured on the underlying disinflationary process, were concerned that second-round effects could be material, and thought it relevant that inflation had exceeded the 2% target for more than five years. For these members, uncertainty about how the conflict would evolve remained high, and so a risk management strategy was appropriate. They believed that a proactive increase in bank rate would reduce the probability of second-round effects setting in. Further, research found that setting policy as if there were stronger second-round effects and course correcting if needed, would prove to be less costly than vice versa," the BoE said.
Bailey's position is that he would not wait until all the second-round effects emerge before acting.
"I think in most situations, if not all, it would be too late about that stage," he said.
On when he would favour acting with policy tightening, he added: "We just have to judge that on the situation we're in."
The bond market, particularly in light of the reaction to Wednesday's Federal Reserve decision and press conference Chair Kevin Warsh, was in focus. The two-year US Treasury yield, sensitive to near-term rate expectations, narrowed to its intraday low after the decision on Wednesday. Conversely, the 10-year and 30-year yields only hit their intraday highs after the rate decision and press conference.
The UK 10-year gilt yield similarly moved higher, as lofty as 5.06% overnight, following the Fed decision. But Bailey believes that in recent months, it is the Middle East conflict that has been the biggest driver in gilt markets, and did not get drawn into commenting on events at the Fed.
On the UK bond market, however, he added: "he market curve is entirely consistent with our reading of the economy."
By Eric Cunha, Alliance News news editor
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