Bailey defends patient approach at Reykjavik economic conference
Bank of England Governor Andrew Bailey said the central bank is tolerating temporarily above-target inflation to support the economy given the impact of the Middle East conflict. In a speech at the Reykjavik 2026 economic conference, Bailey argued that raising rates too aggressively would hurt growth more than help control prices.
The BoE held its base rate at 3.75 percent at its May meeting. This marks the fourth consecutive hold after a series of hikes in 2024 and 2025. The central bank's April Monetary Policy Report presented multiple scenarios for how the Middle East conflict could affect inflation. The most severe scenario showed inflation staying above 3 percent through 2027.
Bailey said the bank is balancing two risks: easing policy too early and letting inflation stay high, or keeping policy tight and damaging the economy. He indicated that cuts could come later this year if inflation shows a clear downward trend. Markets are pricing in a first rate cut in August or September.
Energy prices remain the biggest inflation driver
The conflict between the US and Iran has kept oil prices elevated, with Brent crude trading above $85 per barrel. The naval blockade of the Strait of Hormuz has disrupted tanker traffic and created supply uncertainty. European natural gas prices have also risen as the region competes for alternative supplies.
UK households are feeling the pressure. Energy bills remain about 40 percent higher than before the conflict began in February. Food inflation has moderated to 3.2 percent but remains above the overall inflation rate. Wage growth has slowed to 4.1 percent, giving workers less purchasing power.
Business investment stalls amid geopolitical uncertainty
UK business investment has cooled as companies wait for clarity on the Middle East situation. The latest purchasing managers index showed manufacturing contracting for the third straight month. Service sector activity is barely expanding. The construction sector has been hit by higher material costs linked to energy prices.
The British Chambers of Commerce called on the government to provide more support for businesses facing higher energy costs. The Treasury has so far ruled out additional subsidies, saying the existing Energy Bill Relief Scheme remains in place. Business groups warn that more companies could close if energy prices stay high through the winter.