--- title: "Bank of England Turns Dovish: Allows Inflation to Temporarily Exceed Target, Hinting at Lower Probability of June Rate Hike" type: "News" locale: "en" url: "https://longbridge.com/en/news/288062021.md" description: "Bank of England Governor Andrew Bailey sent dovish signals, stating that inflation temporarily exceeding the 2% target could be tolerated amid weakness in the real economy. He indicated that abandoning the previously expected rate-cut path has constituted substantial tightening, thus favoring holding rates steady at the June 18 meeting. Currently, the interest rate swap market is pricing in only one rate hike by the central bank before the end of the year" datetime: "2026-05-29T11:43:15.000Z" locales: - [zh-CN](https://longbridge.com/zh-CN/news/288062021.md) - [en](https://longbridge.com/en/news/288062021.md) - [zh-HK](https://longbridge.com/zh-HK/news/288062021.md) --- # Bank of England Turns Dovish: Allows Inflation to Temporarily Exceed Target, Hinting at Lower Probability of June Rate Hike Bank of England Governor Andrew Bailey sent clear dovish signals, **stating that against the backdrop of economic weakness, the central bank can tolerate inflation remaining above the 2% target for a period—a stance that has significantly cooled market expectations for a rate hike in June.** On May 29, speaking at an economic conference in Reykjavik, Iceland, Bailey explicitly stated that "against the backdrop of weakness in the real economy and uncertainty regarding the scale and duration of shocks, tolerating inflation temporarily above the target to support the real economy is the appropriate way to handle this trade-off." However, he also warned that this tolerance would decrease if signs of second-round effects emerged. The above remarks imply that Bailey is unlikely to support a rate hike at the Bank of England's Monetary Policy Committee (MPC) meeting on June 18. Market reactions adjusted accordingly—the interest rate swap market is currently pricing in only one 25-basis-point rate hike by the end of 2026, whereas in late April, the market had expected three rate hikes this year. Surging energy prices triggered by tensions in the Middle East have put the UK at risk of a second cost-of-living crisis in less than five years. Bailey's speech indicates that the Bank of England is prioritizing the prevention of further economic decline, but high uncertainty surrounding the inflation outlook continues to make policymakers tread carefully. ## Removing Rate Cut Expectations Has Constituted Substantial Tightening Bailey stated that **by abandoning the previously market-expected path of rate cuts, the Bank of England has effectively tightened policy to a considerable extent.** Before the US and Israel launched attacks on Iran in late February, investors had expected the Bank of England to cut rates by 50 basis points this year, implemented in two steps. After the conflict erupted, expectations reversed to an equivalent magnitude of rate hikes. This shift in expectations drove UK government bond yields sharply higher, thereby raising borrowing costs for households and businesses. "By removing expected rate cuts from the table, we have tightened policy significantly relative to market expectations, and this is already impacting the economy," Bailey said. This means that even if the central bank holds rates steady, the substantial tightening of financial conditions is already playing a role in cooling inflation, providing a rationale for staying put. ## Economic Pressure: Consumption and Investment Both Contract Under Energy Shock Rising energy prices resulting from the Middle East conflict are dragging down the UK economy from multiple dimensions. **Latest data shows that consumer spending has decreased, while businesses are delaying investment, accumulating inventory, and cutting staff. High energy costs compounded by domestic political uncertainty have significantly weakened economic momentum.** Purchasing Managers' Index (PMI) survey data also confirms this trend—surveys released this month show that business activity slowed sharply after a strong start to the year. Meanwhile, the labor market continues to loosen; during the Q&A session, Bailey stated that "the picture of a gradually softening labor market is emerging quite consistently." UK inflation fell to 2.8% in April from 3.3% in March, but analysts point out that this was largely due to one-off measures announced by the government in November. The Bank of England expects inflation to rise again in the coming months. ## Second-Round Effects: The Core Variable in the Policy Dilemma Although Bailey leans towards maintaining stable interest rates, he remains highly alert to the risks of second-round effects. So-called second-round effects refer to a situation where an energy price shock triggers significant wage increases, which in turn drive businesses to raise prices again, forming an inflation spiral. Bailey acknowledged that there are divisions within the Monetary Policy Committee on this issue. Some members are concerned that UK wage growth will be too rapid next year, while more dovish colleagues believe that rising unemployment will curb this risk. Bailey pointed out that since most salary agreements for this year were negotiated before the conflict erupted, the salary data available to the central bank in the coming months is very limited. This could lead to a situation where inflation expectations rise without a corresponding acceleration in wage growth. He also issued a warning citing lessons from four years ago, when inflation triggered by the Russia-Ukraine conflict once soared into double digits. "Because the transmission of second-round effects takes longer, the rationale for looking through indirect effects is weaker; if indirect effects persist for too long, inflation will remain above target for an extended period unless monetary policy responds in a timely manner," Bailey said. ## Market Reaction: Rate Hike Expectations Cool Significantly Throughout May, market expectations for a Bank of England rate hike declined significantly. The interest rate swap market is currently pricing in only one 25-basis-point rate hike by the end of 2026, a rather significant shift compared to the three rate hikes expected in late April. Following Bailey's remarks, the initial market reaction was muted. He is subsequently scheduled for an exclusive interview with Stephanie Flanders, Bloomberg's Economics and Government Affairs Editor, which may provide more policy clues. **The MPC meeting on June 18 will be the next important node.** Bailey's remarks provided a relatively clear signal for holding rates steady, but the evolution of the inflation outlook—especially energy price trends and wage data—will remain the key variables determining the policy direction. ### Related Stocks - [VUKE.UK](https://longbridge.com/en/quote/VUKE.UK.md) - [ISF.UK](https://longbridge.com/en/quote/ISF.UK.md) - [SUK2.UK](https://longbridge.com/en/quote/SUK2.UK.md) ## Related News & Research - [UK Inflation Remains Stable At 3.0%](https://longbridge.com/en/news/280470178.md) - [Federal Reserve Watch for May 29: Overreacting to Energy Price Spike Could Depress Economic Growth Unnecessarily, Bowman Says](https://longbridge.com/en/news/288105964.md) - [Should You Think About Buying Hyundai Motor Company (KRX:005380) Now?](https://longbridge.com/en/news/287692992.md) - [RBNZ expected to hold today but hawkish forecasts to signal rate rises ahead](https://longbridge.com/en/news/287695181.md) - [ECB April meeting account notes that upside risks to inflation had intensified](https://longbridge.com/en/news/287911895.md)