The governor of the Bank of England (BoE), Andrew Bailey, has reaffirmed the central bank's “unwavering” commitment to reducing inflation to its 2% target, as he admits that these have been hard times for businesses and households.
“Our commitment to the 2% inflation target is unwavering,” Andrew Bailey said in a speech at Iceland’s Reykjavik Economic Conference.
The rate cut reflects the bank's response to global economic pressures, but Bailey reminded the audience that setting monetary policy in such a volatile environment remains a formidable task.
He said: “A sequence of unprecedented global shocks has created a very challenging environment for monetary policy. The largest pandemic in a century, the largest war in Europe since 1945, and now a trade war between the world’s two largest economies — these are not small and simple disturbances to aggregate demand, and they come against a backdrop of low productivity growth and ageing populations.
“While it remains to be seen how recent changes to global trade policies will play out and what the effects on our economies will be, the effects of the pandemic and Russia’s brutal war on the Ukrainian people are fresh in our minds.
“Our economies have suffered, inflation has surged. These have been hard times for businesses and households, not least those on lower incomes.”
Bailey also warned that global economic conditions are expected to remain volatile and unpredictable in the coming years, posing additional challenges for central bank forecasters.
"We need no reminder that the global economic environment is likely to continue to be challenging — and less predictable — than it was in the past," he said.
The governor also discussed the recent trade deal between the US and the UK, calling it a positive development, but noted that it left tariffs on most British exports to the US higher than they were before last month.
"It's good news in a world where it will leave the effective tariff rate higher than it was before all of this started," Bailey stated during a Q&A session at the conference.
Bailey reiterated that Britain’s economy is particularly vulnerable to global economic shifts, especially those involving the US. He stressed that the economic health of the UK will depend heavily on the nature of future trade agreements that other countries, including the US, strike with each other.
In an interview with the BBC on Thursday, Bailey expressed hope that the UK and the European Union (EU) could rebuild their relationship following Brexit, underscoring the importance of fostering closer ties between the two sides.
“It would be beneficial having a more open economy to trade with the European Union, because there has been a fall-off in goods trade with the EU over recent years,” he said.
He also pointed out that UK goods exports to the EU were around 18% lower in 2024 compared to pre-Brexit levels in 2019, a drop exacerbated by the pandemic’s economic shock.
Despite Trump's assertion that the recent trade deal was only possible because of Brexit, Bailey declined to take a stance on the broader political implications. Instead, he reiterated the importance of rebuilding trade relations:
He added: “It is important we do everything we can to ensure that whatever decisions are taken on the Brexit front do not damage the long-term trade position. So I hope that we can use this to start to rebuild that relationship.”
Bailey also rejected claims of “groupthink” at the BoE, after the Monetary Policy Committee’s (MPC) nine members were split three ways in yesterday’s vote on interest rates.
“Policy discussions on the MPC are open, frank and lively — as they should be. Expert views are exchanged, assumptions investigated, and questions posed. Three-way splits are not unheard of. I can honestly say that there is no groupthink on the MPC,” the governor said in Reykjavík.
Bailey, along with four other members, voted for the 0.25% rate cut, while two policymakers advocated for a more aggressive reduction to 4%, and two others voted to maintain the 4.5% rate. The division highlights the uncertainty and complexity of current economic conditions.
Explaining this uncertainty, Bailey presented two potential economic scenarios. In the first, global and domestic uncertainty could suppress UK demand more than expected, helping to reduce inflationary pressures. In the second scenario, rising energy prices could trigger second-round effects, further straining supply chains and exacerbating inflation.
"Forecasting became much more difficult, irrespective of the specific models and approaches used," Bailey admitted, adding that the combination of the pandemic, energy shocks, the war in Ukraine, and the ongoing trade war has made it exceptionally difficult to predict future economic developments.
"We need no reminder that the global economic environment is likely to continue to be challenging — and less predictable — than it was in the past."
Despite the uncertainties, Bailey reinforced the BoE’s resolute stance on inflation control. “We can say we are on course to put the inflation surge firmly behind us,” he said.
