BoE Governor Bailey: Rate Cuts Still Not on the Table
N.R. Finch
BoE Governor Bailey said at the Sintra forum that rate cuts are not under consideration, even as energy prices have dropped sharply and the inflation threat is fading fast — the lagged pass-through of the energy cap and second-round risks keep the central bank from opening the door.
Energy prices have already fallen — why no rate cut?
Bailey's core logic: the UK energy price cap resets only once every three months, so the Iran-war shock hits households with a built-in lag.
The cap was raised 13% on Wednesday, reflecting earlier wholesale cost spikes — meaning families are still paying prices from months ago, not today's lower market rates.
Bailey used a football analogy: "We always look a bit better in the first half than the second." This means → wholesale energy has already dropped, but the pass-through to household bills takes time, and the BoE needs to wait for the "second half" data.
What is the market betting — and how did Bailey respond?
After the US-Iran ceasefire, energy prices fell sharply. Economists now expect UK peak inflation to land well below the BoE's April forecast.
Traders have slashed rate-hike bets; the market currently prices in less than 25 basis points of hikes this year.
Bailey pushed back explicitly: "Markets had expected rate cuts this year, which was not unreasonable given the softening economy. But that expectation was shelved in March, and it remains so." In plain terms = the market thinks the worst is over and cuts should follow; Bailey's answer is "you're not wrong, but I'm not ready to act."
How divided is the BoE internally?
Bailey has leaned dovish in recent months, preferring to wait and see whether the Iran conflict triggers an inflation shock.
MPC dove Alan Taylor has gone further, saying officials should prepare to cut if inflation stays moderate.
But Bailey also stressed that some officials still worry the energy shock could trigger second-round effects in wages and prices — energy costs push up living expenses → workers demand higher pay → firms pass costs on → prices rise again. This reflects a central bank whose real disagreement is not about direction, but about whether the risk is fading fast enough.
What does this mean for markets?
Bailey's stance locks out any near-term rate-cut expectations — even if data keep improving, the BoE needs at least one or two more energy-cap resets before it can move.
This means → rates may stay elevated longer than the market currently prices, sending a "tighter-for-longer" signal for sterling assets and mortgage rates.
The real inflection point depends on whether inflation falls as expected after the next cap reset, and whether wage data show any sign of second-round effects.
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