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Tuesday, Jul 21, 2026

Cost of living: Bank of England governor warns sharper rate hike is 'not locked in' as economy slows

Cost of living: Bank of England governor warns sharper rate hike is 'not locked in' as economy slows

Andrew Bailey uses a speech to the City to warn that market expectations of a 50 basis point hike in Bank rate next month is not guaranteed while the new chancellor outlines plans to boost the financial sector's global competitiveness.

The governor of the Bank of England has warned that the prospect of a sharper increase in Bank rate next month is "not locked in" amid growing evidence of an easing in economic growth and in some inflationary pressures.

Andrew Bailey told the City of London's annual Mansion House dinner that while the prospect of a 50 basis points rise in Bank rate will be on the table next month, the monetary policy committee recognised there was a trade off in a situation of high inflation and low growth.

Rising interest rates tend to hurt demand as borrowing costs rise but much of the inflation witnessed in the UK is on the supply side and out of the Bank's control - a consequence of the energy price spike following Russia's invasion of Ukraine.

Policymakers are most worried by supply side inflation stoking wage rises in line with the pace of price increases, arguing it will make the inflation problem more persistent.

Mr Bailey argued that there was strong evidence of a weakening economy and that May's figures for economic growth - showing a 0.5% lift compared to April - should be treated with caution against a weakening backdrop in demand.

He was speaking as the Bank is urged to take firmer action against the threat to the economy posed by inflation - currently at its highest level for 40 years at 9.1%.

Mr Bailey spoke out in defence of the Bank's independence this month following criticism from politicians - including Tory leadership candidate Liz Truss - that it has bungled efforts to date to tame the pace of price increases.

The governor used his speech to reiterate that monetary policy would bring inflation back to the Bank's 2% target.


Financial markets currently see a 94% chance that the Bank will raise Bank rate to 1.75% from its current level of 1.25% on 4 August.

But Mr Bailey said: "At the MPC's last meeting we adopted language which made clear that if we see signs of greater persistence of inflation, and price and wage setting would be such signs, we will have to act forcefully.

"In simple terms this means that a 50 basis point increase will be among the choices on the table when we next meet.

"50 basis points is not locked in, and anyone who predicts that is doing so based on their own view."

The Bank, which has predicted that inflation will hit 11% in October when the next energy price cap increase is due to be implemented, could also raise that forecast at its next meeting which is followed by the quarterly monetary policy report.

Mr Bailey said on the current situation for inflation: "The big external shocks - from Russia and supply chains (post-COVID) - account both for a large part of the inflation overshoot above target and for the squeeze on real incomes.

"My sense of the latest data is that the supply chain/goods shock has started to ease, but the Russian impact - particularly on natural gas prices in Europe is going the other way as we look ahead to the winter."

Chancellor Nadhim Zahawi also addressed the dinner.

He confirmed a focus on fighting inflation and a post-Brexit reworking of financial regulation inherited from the European Union, including Solvency II insurance rules.

He told the Mansion House audience that regulators will have to promote the global competitiveness of Britain's financial sector or face mandatory reviews of their rules.

The chancellor confirmed that the long-awaited financial services and markets bill would be introduced before parliament on Wednesday to "capitalise on the benefits of Brexit and transform the UK financial services sector".

Mr Zahawi said the bill, which includes cutting "excessive" capital buffers at insurers to invest in infrastructure, will
unlock "tens of billions of pounds", a step which pits it against a more cautious Bank of England.

The bill also cracks down on financial scams including push payment fraud.

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