UK Central Bank Chief: Inflation can be tolerated to exceed target level in the short term

Bank of England Governor Andrew Bailey said in a speech on Friday in Iceland that, given the current weak state of UK economic growth, the central bank can tolerate inflation being higher than its established target for a short period of time.

Bailey pointed out that since the United States and Israel launched attacks on Iran in late February, the surge in energy costs resulting from conflicts in the Middle East have on one hand driven up the UK's inflation rate, and on the other hand, are also expected to drag down economic growth. This has put the Bank of England in a very difficult policy balancing act.

By directly ruling out the interest rate cut option that the market had expected previously, the Bank of England has, in effect, tightened monetary policy, which has also directly led to an increase in the UK's latest new housing mortgage rates.

Bailey said that allowing inflation to exceed the target temporarily to provide some support to the real economy is an appropriate way to deal with this macro policy trade-off. However, once signs of a second-round effect begin to emerge in the market, this tolerance for high inflation will weaken.

This statement implies that at the Bank of England's Monetary Policy Committee meeting to be held next month, the governor may not support the option of raising the benchmark interest rate.