The ongoing war in the Middle East has resulted in what the head of the Bank of England, Andrew Bailey, has described as “a major supply shock.”
He did not, however, provide specific details on how this situation might impact interest rates.
Bailey acknowledged that the conflict in Iran has significantly affected the global economy, but emphasised that the UK is better equipped to handle these challenges due to its resilient banking system, which was strengthened following the financial crisis of 2007-2009.
He spoke with financial leaders, including Chancellor Rachel Reeves, before their trip to Washington, D.C., for the spring meetings of the International Monetary Fund (IMF).
On Tuesday, the IMF released a pessimistic outlook, noting that the UK has experienced the largest cuts to growth forecasts among major global economies.
The IMF indicated that rising energy prices due to the war are likely to push UK inflation towards 4%, double the Bank of England’s target, thereby contributing to higher costs for households. The conflict has disrupted oil and gas supplies, as Iran tightens its control over the strategic Strait of Hormuz, leading to a U.S. blockade of the country’s ports amid a fragile ceasefire.
Prime Minister Sir Keir Starmer is working to ensure safe navigation in this critical Gulf waterway. U.S. President Donald Trump criticised the UK for not increasing oil extraction in the North Sea, urging the nation to “drill, baby, drill.”
In response, Reeves condemned President Trump’s “folly” in engaging in war with Tehran without a clear exit strategy.
Bailey said: “We obviously are going through another large shock in the world economy that has monetary policy implications, it has potentially financial stability implications as well.”
But he added: “I would argue that we are in a much better place today because we have got a resilient banking system, than we would be if we didn’t have.
“I think if we didn’t have a resilient banking system, I’m not going to predict what would happen, but I think we would be spending a lot more time worrying about financial stability.
“I’m not saying we’re not worrying about financial stability, but we have got a resilient banking system, and that is because we’ve spent the best part of what, 17 years now, since the financial crisis, ensuring that we got back to that position.
“That underlying resilience is important, because we don’t get stability more broadly, we don’t get growth on our economies without it.”
Bailey chairs the Bank’s Monetary Policy Committee (MPC), which is responsible for setting interest rates that influence both lending and saving. The nine-member committee is scheduled to meet on April 30 to make their decision, and Bailey stated that he is taking a position of “studious neutrality” regarding the matter.
Speaking about the ongoing crisis in the Middle East Bailey said: “It’s a major supply shock. I said in the paragraph I wrote in the last MPC minutes, there’s no question that the best way to deal with supply shocks is at the source of the shock.
“The source the shock is not monetary policy. It’s obviously what’s going on in the Gulf and in the Strait of Hormuz.
“The source of the shock is not monetary policy. It’s obviously what’s going on in the Gulf and in the Strait of Hormuz.
“What we have to do is assess both the so-called first-round effects, which is obviously how long is this thing going to go on for? What is going to be the impact of it?
“But then we also have to assess the second-round effects on inflation, which are going to be really to what extent is it going to generate persistence?
“And that will require us to set that against the background of the condition of both the UK economy and the world economy we’re operating in. And that’s the judgment that we’re going to have to exercise repeatedly.”
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