Andrew Bailey, governor of the Bank of England, has indicated that the Bank could take a more aggressive stance in cutting interest rates if inflation continues to fall.
However, he warned that escalating tensions in the Middle East could lead to a sharp rise in oil prices, complicating the Bank’s policy outlook.
Speaking to The Guardian, Bailey suggested that the Monetary Policy Committee (MPC) could accelerate the pace of policy easing if inflationary pressures continue to ease. “There is a possibility that we could be a little more aggressive in cutting rates if inflation continues to dissipate,” he said. This has already put downward pressure on the pound, which fell 1.05 percent to $1.31, although some of this fall was attributed to traders seeking safer assets amid the growing conflict between Israel and Iran .
Bailey, who has been at the helm of the Bank since 2020, expressed concerns about the situation in the Middle East and warned of the potential for a 1970s-style oil crisis if tensions escalate further. “The conversations I have had with colleagues in the region suggest that there is currently a strong commitment to keeping the market stable,” Bailey said, but added that control over oil markets could deteriorate if the conflict worsens. He pointed to past experience where oil price increases had a significant impact on monetary policy, and noted the role oil played in fueling inflation in the 1970s.
Britain has experienced a sharp decline in inflation, which peaked at 11.1 percent in October 2022 but has since fallen to 2.2 percent. Despite this progress, oil prices have risen sharply in recent days, driven by the latest developments in the Middle East. Brent Crude and WTI, the global benchmarks, both rose to over $70 a barrel after Israel’s invasion of southern Lebanon and Iran’s retaliatory missile strikes.
These rising prices come after a year of declining demand from China and speculation that Saudi Arabia could increase supply, trends that had pushed prices down earlier in 2023. The current uncertainty has prompted the MPC to adopt a cautious approach. The committee voted 8-1 at its last meeting to keep the UK base rate at 5 percent, and although they made a 25 basis point cut in August – the first cut since March 2020 – traders expect another cut next month.
Bailey also responded to criticism from former Prime Minister Liz Truss, who accused him of being part of a left-wing economic cabal that undermined her brief premiership. Referring to the pensions crisis caused by Truss’s mini-budget, Bailey noted: “We came in and used our intervention tools to tackle the problem of financial stability. It is ironic that someone who is critical of regulators then goes on to say that the problem was that the Bank of England did not regulate enough.”
The pensions crisis followed Truss’s controversial £45 billion package of unfunded tax cuts, which caused a sharp rise in interest rates and pushed down bond prices, creating liquidity problems for pension funds. The Bank of England was forced to intervene with a limited bond buying program to restore market stability.
Looking ahead, Bailey praised Chancellor Rachel Reeves for her focus on boosting capital investment to tackle climate change and stagnant productivity growth. He also acknowledged the challenges in Labour’s handling of the economy since taking office in July, as the government prepares to deliver its first budget on October 30. Although taxes are expected to rise, the Chancellor plans to soften the impact through greater public investment in key sectors.