Andrew Bailey, the Governor of the Bank of England, has indicated that the Bank may take a more aggressive stance in reducing interest rates if inflation continues to decline.
However, he warned that the increase in unrest in the Middle East may lead to a significant increase in the price of oil, which will make it difficult to observe the Bank’s goals.
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. “It is possible that we can be aggressive in reducing prices if inflation continues to disappear,” he said. This has already put downward pressure on the pound, which fell 1.05 percent to $1.31, although part of the decline was due to traders looking for a safe haven amid heightened tensions between Israel and Iran.
Bailey, who has been in charge of the Bank since 2020, has expressed concern about the situation in the Middle East, warning of the possibility of an oil crisis dating back to the 1970s if tensions escalate. “Discussions I’ve had with our partners in the region suggest that at the moment there is a strong commitment to keeping the market stable,” Bailey said, but added that control of oil markets could deteriorate if the conflict escalates. He cited past experiences where oil price increases had a significant impact on monetary policy, noting the role oil played in fueling inflation in the 1970s.
The UK experienced the biggest drop in inflation, rising to 11.1 per cent in October 2022 but falling by 2.2 per cent. Despite this progress, oil prices have risen in recent days, driven by recent developments in the Middle East. Brent Crude and WTI, global benchmarks, both rose to above $70 a barrel following Israel’s attack on southern Lebanon and Iran’s retaliatory missile strikes.
The rising prices come after a year of declining demand from China and speculation that Saudi Arabia may increase supply, trends that have been pushing prices down since early 2023. The current uncertainty has prompted the MPC to take a cautious approach. The Committee voted 8-1 to hold the UK base rate at 5 percent during its last meeting, and although they used a 25-point cut in August—the first reduction since March 2020—traders expect another cut next month.
Bailey also responded to criticism from former Prime Minister Liz Truss, who accused her of being part of a left-wing economic cabal that undermined her premiership. Referring to the pension crisis caused by Truss’s small budget, Bailey commented, “We have come to use our intervention tools to deal with the financial stability problem. It’s strange that someone who criticizes regulators then says the problem is that the Bank of England was not regulating enough.”
The pension crisis followed Truss’s £45 billion package of unfunded tax cuts, which caused a sharp rise in interest rates and forced up 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 promoting capital investment to address climate change and sustainable productivity growth. He also expressed the challenges brought by the handling of the economy by workers since he took office in July, as the government prepares the first Budget on October 30. Although taxes are expected to rise, the Chancellor plans to mitigate the impact with greater public investment in key sectors.