Andrew Bailey, Governor of the Bank of England, has indicated that the Bank may take a more aggressive stance on cutting interest rates if inflation continues to decline.
However, he cautioned that escalating tensions in the Middle East could lead to a sharp rise in oil prices, which would complicate the Bank’s policy outlook.
Speaking to The Guardian, Bailey suggested that the Monetary Policy Committee (MPC) could quicken the pace of policy loosening should inflationary pressures continue to ease. “There’s a possibility we could be a bit more aggressive in lowering rates if inflation keeps dissipating,” he said. This has already put downward pressure on the pound, which fell by 1.05 per cent to $1.31, although part of this drop was attributed to traders seeking safer assets amidst the intensifying conflict between Israel and Iran.
Bailey, who has been at the helm of the Bank since 2020, voiced concerns about the situation in the Middle East, warning of the potential for a 1970s-style oil crisis if tensions escalate further. “The conversations I’ve had with counterparts in the region suggest there’s currently a strong commitment to keep the market stable,” Bailey said, but he added that control over oil markets could deteriorate if the conflict worsens. He pointed to past experiences where oil price surges significantly impacted monetary policy, noting the role that oil played in driving inflation during the 1970s.
The UK has experienced a sharp drop in inflation, which peaked at 11.1 per cent in October 2022 but has since fallen to 2.2 per cent. Despite this progress, oil prices have surged in recent days, driven by the latest developments in the Middle East. Brent Crude and WTI, the global benchmarks, both climbed to over $70 a barrel following Israel’s incursion into southern Lebanon and Iran’s retaliatory missile strikes.
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