Bank of England can tolerate inflation above 2% target, says Bailey
Bank of England Governor Andrew Bailey stated that allowing inflation to exceed the 2% target temporarily is appropriate amid economic uncertainty, acknowledging inflation will rise further due to energy costs and supply chain pressures. The Monetary Policy Committee kept interest rates at 3.75% in April despite predicting higher inflation, with Bailey warning that external shocks like energy price increases will worsen the UK’s terms of trade and reduce real incomes.
Bank of England Governor Andrew Bailey defended the central bank’s approach to inflation, stating that tolerating temporary rises above the 2% target is necessary to support the UK economy amid weakness and uncertainty. Speaking in Reykjavik, Iceland, Bailey warned that reacting too quickly to inflation concerns could create undesirable market volatility. He emphasized that the current economic context—marked by softness in the real economy and lingering shocks—justifies allowing inflation to stay above target for a limited period, though this tolerance would diminish if second-round inflation effects emerged. The UK government mandates the Bank of England to maintain consumer price inflation sustainably at 2%, with monetary policy tools used to achieve this goal. Despite this, the Monetary Policy Committee (MPC) held interest rates steady at 3.75% during its April meeting, even as it forecast inflation to climb in the coming months. Official data showed inflation at 2.8% in April, though Bailey predicted further increases this year due to rising utility bills and businesses passing on higher supply chain costs. Bailey acknowledged that monetary policy cannot mitigate external shocks, such as surging energy prices, which are directly impacting households and businesses. As a net energy importer, the UK faces worsening terms of trade, leading to falling real incomes and heightened inflationary pressures. The governor stressed that these factors will weigh on economic activity, reinforcing the need for a cautious approach to rate adjustments. The Bank’s stance reflects a balancing act between controlling inflation and preventing deeper economic damage. While Bailey acknowledged the risks of prolonged elevated inflation, he framed the current tolerance as a deliberate strategy to stabilize growth in an uncertain environment. The MPC’s decision to maintain rates at 3.75% signals a measured response, prioritizing stability over immediate inflation suppression.
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