Bank of England Governor Andrew Bailey: Would have been at inflation target if not for Iran war

Summary

Bank of England Governor Andrew Bailey explains the central bank's decision to leave rates unchanged, attributing the delay in returning to the 2% inflation target to the oil price spike from the Iran war. He notes the UK economy is softening, which helps contain second-round effects, and expects inflation to eventually fall back to target, though later than previously hoped.

• Bailey attributes the missed inflation target to the Iran war oil price shock.
• UK inflation currently at 2.8%, expected to rise to ~3.2% later this year due to household energy price cap lag.
• BOE held rates steady; markets had priced in cuts, so holding effectively tightened policy.
• 2-5 year UK mortgage rates rose ~1% after rate-cut repricing, and remain 60-70 bps above pre-shock levels.
• UK economy is soft, with a small output gap opening and labour market weakening.
• Bailey believes evidence suggests inflation will return to target, but it will take longer.
• The committee has diverse views, with some hawkish dissent, but Bailey sees the tightening built into the curve as giving time to judge pass-through.