Bank of England Governor Andrew Bailey warned that risks to inflation remain “positive” as renewed fighting in the Middle East drives up energy prices.
“The conflict is still ongoing and it is also causing high levels of energy prices and some volatility in energy prices,” Bailey told MPs on Tuesday, adding that energy price turbulence is “being passed on to the financial markets.”
The Bank of England’s Monetary Policy Committee kept rates steady at 3.75% in July but signaled it would still have to raise borrowing costs if inflationary pressures proved prolonged.
Traders expect the MPC to rise by one to two-quarter points by the end of the year, in line with levels suggested by swap markets, but believe there is only a slim chance of a change when rate-setters meet next week.
Bailey told MPs on the Treasury Committee that the MPC had no “secret plan” for what it would do next on interest rates.
The MPC kept rates steady despite inflation reaching 2.9% in July, above the Bank of England’s 2% target. In contrast, the European Central Bank is widely expected to raise rates later this week, and economists are watching to see whether the US Federal Reserve will follow suit.
MPs heard from Bailey and his colleagues after Chancellor John Healey earlier on Tuesday pledged to “build on” the work done by his predecessor Rachel Reeves as he seeks to reassure markets that he will not abandon his commitment to fiscal discipline.
Taking questions in the House of Commons for the first time in his new job, Healey said Reeves had restored Britain’s economic authority.
Bond investors saw Reeves as a bulwark against calls from Labor MPs for more borrowing and spending.
“She has done the hard work of restoring Britain’s financial confidence, public services and levels of economic growth after 14 years of failed Conservative government. I now build on that work,” Healey told MPs.
Healey, who replaced Reeves at the end of July, is under growing pressure to rebuild the government’s fiscal cushion, which has been eroded by rising gold yields in recent weeks.
Earlier on Tuesday, Britain offered the highest interest rate on its debt sale in nearly three decades, the latest sign that investors are demanding a higher premium when buying government debt.
The UK government’s borrowing costs rose after renewed fighting in the Middle East drove up oil prices, reigniting inflation fears and triggering a global bond sell-off.
Economists expect the chancellor will have to raise taxes in the budget next month to restore his fiscal cushion.