Middle East crisis clouds outlook for interest rates: Bailey sounds alarm amid stagflation fears
The governor of the Bank of England has warned that unpredictable events in the Middle East are creating a further headache over interest rates.
Andrew Bailey made the comments to peers as oil prices retreated from a spike earlier in the week amid rapidly changing developments in the conflict between Israel and Iran.
'It is so unpredictable at the moment that as we saw in the last 24 hours it can easily change overnight,' he told the Lords' economic affairs committee.
Oil price volatility is an issue for the Bank as higher prices can push up inflation – making it harder to cut interest rates.
It adds to the difficulty for the Bank as it is already facing the spectre of stagflation – a scenario when the economy flatlines while inflation spirals.
The prospect of such a scenario was raised yesterday by another Bank of England official, Megan Greene.
The oil price soared to more than $80 earlier in the week after the US bombed Iran's nuclear sites.
But it came down sharply to below $70 yesterday as Donald Trump declared there had been a ceasefire and fears eased that Iran would block global oil supplies in retaliation.
Bailey told peers: 'We've seen so far rather a big turnaround overnight in terms of the situation with the oil price.'
Trump's tariff wars are adding to the chaotic mix, as a 90-day pause in the worst of the levies comes to an end. Bailey said: 'It is very unpredictable where this is all going to end up.'
And he pointed out that the impact of trade wars on UK inflation is hard to forecast.
It could mean cheap Chinese goods blocked from the US market flooding the UK and bringing down prices. Or it could mean supply chain disruption that pushes prices up.
Bailey said he was not 'putting that high a weight' on the latest global developments when deciding on interest rates given the volatility.
But he cautioned that it made it even harder to signal the future path of rates. He added: 'I would never give a prediction about what the next meeting will do anyway, but in these circumstances we are particularly careful about what we say on that front because the world is just so uncertain.'
He also warned of the weakness of Britain's employment market, as firms respond to Labour's National Insurance raid by scaling back pay and jobs.
The labour market was 'softening' and pay rise agreements were 'coming down', Bailey (pictured) said.
His comments come after recent figures showing more than 100,000 jobs were lost in May. Earlier at a separate event, Greene – who sits alongside Bailey on the Bank's rate-setting monetary policy committee – flagged the potential for a stagflation scenario.
That is especially tricky for central banks because if they hike rates to bring down inflation, that can put the brakes on growth.
Greene said: 'I think the risks remain two-sided but skewed to the downside on growth and to the upside on inflation. This is an uncomfortable place to be for a central banker.'
The Bank last week left interest rates on hold at 4.25 per cent. Markets are betting there will a quarter point cut to 4 per cent at its next meeting in August.
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