Key facts
- Bank of England Governor Andrew Bailey warned of persistent inflationary pressures in the UK.
- He indicated energy prices could increase further due to the ongoing conflict in Iran.
- Bailey noted that higher short-term bond yields reflect upside risks to inflation.
- The Bank of England's Monetary Policy Committee will decide on interest rates next week.
- UK inflation was 2.9% in the year to July, and government borrowing costs are at a 30-year high.
Bank of England Governor Andrew Bailey has warned that inflationary pressures continue to impact the UK economy, with the potential for further increases in energy prices if the conflict in Iran persists. Speaking to MPs, Bailey stated that the risks to inflation were "to the upside" and that energy prices "could be higher still" due to the ongoing conflict, which has already caused a surge in oil prices and global inflation fears.
Bailey highlighted that the conflict has led to elevated and volatile energy prices, which are feeding into financial markets. Brent crude prices approached $100 a barrel following attacks on Saudi Arabian refineries by Iran-aligned Houthi militias, disrupting some operations. He also noted that higher short-term bond yields, suggesting potential interest rate hikes, are consistent with a pessimistic view of the UK economy's risks, though he stressed there was "no secret plan" and decisions would be data-led.
The Bank's Monetary Policy Committee is set to decide on interest rates next week. Bailey expressed concern over the security of oil and gas supply chains in the Middle East, particularly with the lack of a peace deal between the US, Israel, and Iran. Previous Bank reports indicated inflation could exceed 4% if oil prices remained at $100 per barrel for an extended period. Inflation in the UK stood at 2.9% for the year to July, an increase from 2.6% in June.
These warnings come as the UK faces its highest borrowing costs on new debt in nearly 30 years, with UK government bond yields hit harder than in other developed nations. Bailey attributed this to market fears of persistent inflation and the risk premium demanded for potential prolonged trade disruptions through the Strait of Hormuz. He also mentioned that second-round effects, where higher prices lead to increased wage growth, could further fuel inflation. Bailey also voiced concern over the high youth unemployment rate of approximately 16%, while acknowledging that a slowdown in the jobs market could temper price pressures.