Bailey: Evidence of Second-Round Inflation Is Modest, Bank of England Has Effectively Tightened Policy
nashnova research
BoE Governor Bailey said second-round inflation evidence is "quite benign" but it is too early to draw conclusions; although the Bank has not raised rates, policy has tightened in practice through market rates, and rate-cut expectations have been fully unwound.
How serious is second-round inflation?
Bailey said there is almost no evidence that energy-price rises are feeding through to the broader economy. Second-round inflation — the chain reaction where energy costs push up wages and other prices — looks "quite benign" so far.
He stressed it is still "too early" to conclude. Whether the energy shock has seeped into wage- and price-setting remains an open question.
This means → The Bank is not declaring victory; the data simply has not flashed red yet. Every meeting will reassess from scratch.
Why did rate-cut expectations vanish?
Bailey noted that before the Middle East conflict erupted in February, inflation was on track to hit the 2% target by late spring. Markets had priced in several rate cuts — which he called "quite reasonable."
After March, rate-cut expectations were fully unwound. Bailey called this "extremely frustrating."
In plain terms = the finish line was in sight; a geopolitical shock dragged the progress bar back to the start. Rate cuts went from "soon" to "nowhere in sight."
No rate hike — so how is policy "tighter"?
Bailey said the BoE has not raised the official rate, but relative to the rate-cut path markets had expected, policy has tightened in practice.
In plain terms = markets expected rate cuts that never came. From a borrower's perspective, rates are materially higher than anticipated — the effect is equivalent to a hike.
The tightening is already visible in mortgage rates, which Bailey said have risen by more than in most G7 economies.
What is happening with businesses and growth?
Bailey said conversations with businesses across the country reveal a "very strong desire to cut costs" — the heart of the current inflation story.
This means → Companies are actively squeezing expenses rather than passing higher costs on to consumers — exactly the signal the Bank wants to see.
On growth, Bailey said the UK economy has shown "more resilience than expected" but added that "growth is not as strong as we need it to be."
What comes next?
These remarks came on the eve of the BoE's early-November rate decision. Bailey explicitly warned anyone trying to read his next move: "You haven't guessed it."
The transmission path of second-round inflation remains the core variable at every meeting of the Monetary Policy Committee.
This reflects a deliberate ambiguity — the Bank wants neither a market rush to price in cuts nor a signal that hikes are coming, preserving room to judge meeting by meeting.
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