Exclusive: Bank of England's Bailey says investors shouldn't count on rising UK rates

Exclusive: Bank of England’s Bailey says investors shouldn’t count on rising UK rates

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  • Bailey says the situation is not the same as in 2022, firms have less pricing power
  • Stock market prices doubled this year
  • JP Morgan cuts BoE rate forecast after talks
LONDON, April 1 (Reuters) – Bank of England Governor Andrew Bailey said on Wednesday that markets were bracing for a rise in interest rates by the central bank, which is seeking to avoid adding to the damage Britain’s economy has faced since the Iran war.
Bailey, speaking to Reuters at the central bank’s headquarters in London, said BoE policymakers will need to focus clearly on risks to growth and jobs as well as inflation when making the next rate decision.

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The war in the Middle East has raised energy prices significantly, fueling inflation but also affecting the global economy.

“It is clear that we will have to take action with a monetary policy if we think it is appropriate to do so. But it strikes me, and it still strikes me today, that the most important thing is to deal with the source of the panic,” Bailey said in an interview.

“Of course, we have to deal with the concerns that come our way. But our remit is very clear on this issue that … we should do so in a way that … causes the least damage in terms of economic activity and employment issues,” he added.

Bailey also highlighted the risks posed by the Iran war to strong financial markets, following the central bank’s warning earlier in the day of weakness in the private credit and bond markets.

MARKETS ARE ‘GETTING AHEAD OF THEMSELVES’

Financial markets are currently priced at two by the BoE this year – and have previously been priced at four – while most economists polled by Reuters expect rates to remain on hold.

“(The market) is paying us to raise rates. I’m still going to say that’s the judgment that the markets have to make but I think they’re moving forward,” Bailey said.

British government bond prices rose shortly after Reuters reported talks with US bank JP Morgan said it now expects the BoE to raise rates in June, up from its earlier forecast of hikes in April and July.

While the BoE voted unanimously to keep interest rates at 3.75% last month, Bailey has been a strong candidate for the Monetary Policy Committee at previous meetings.

“Bailey’s comments suggest that April is too close for many hikes,” JP Morgan’s chief UK economist Allan Monks wrote in a note to clients.

Item 1 of 2 Bank of England Governor Andrew Bailey speaks to Reuters in an interview after the central bank published its latest report on financial risks, including the impact of the Iran war, in London, Britain, April 1, 2026. REUTERS/Hannah McKay

[1/2]The governor of the Bank of England Andrew Bailey speaks to Reuters in an interview after the central bank published its latest report on the risks of the financial sector, including the impact of the Iran war, on … Purchase Licensing. Rightsopens a new tab Read more

Some members talked about the possible need to raise rates to prevent inflationary threats but Bailey said that the rise of the protection rate may not be in line with his views on how the BoE should implement to keep inflation at 2% over the medium term.

“I am sure that the MPC will be discussed, it would be appropriate to do so. But we have to judge that issue according to the way our frame is built,” he said.

Bailey cited comments made during the 2011 inflation crisis by former BoE Governor Mervyn King, who said it was the BoE’s job to implement its monetary policy in a way that caused the least damage to the economy and people.

The MPC announces its next interest rate decision on April 30.

BUSINESSES NEED PRICE POWER, BAILEY SAYS

Before the crisis, British inflation was on course to return to its 2% target and the BoE had said a rate cut was likely. That changed dramatically when the Iran war began, a change that Bailey said was “very confusing”.

The British economy is considered to be particularly exposed to the effects of rising global energy prices, due to its heavy reliance on natural gas to generate electricity and heat homes.

Last month the BoE said it expected inflation to reach 3.5% in the third quarter of 2026, almost double its 2% target but below the peak of 11.1% in October 2022.

Bailey said the BoE was watching the rise in household price expectations last month “very carefully” but said they often reflected measures of headline inflation and that the message he received from businesses was that they had little capacity to raise ⁠.

“Businesses keep telling me they’re operating in a climate of price volatility,” he said.

Bailey said that passing on high energy costs by businesses is possible, but the overall climate was one of economic weakness, unlike 2022 when energy prices rose due to Russia’s full-scale invasion of Ukraine.

“The current context is one of an easing labor market. We think that performance is somewhat below capacity – so there is a small productivity gap that is opening up,” he said.

Additional reporting by Andy Bruce and Suban Abdulla; Written by David Milliken; Edited by William Schomberg and Toby Chopra

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