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<\/p>\nBank of England Governor Andrew Bailey attends the central bank’s Monetary Policy Report press conference at the Bank of England, in the City of London, on May 8, 2025. <\/p>\n
Carlos Jasso | Afp | Getty Images<\/p>\n
Bank of England policymakers must contend with the “most difficult combination” of economic effects, according to governor Andrew Bailey, as the U.K. faces the consequences of an energy price shock. <\/p>\n
The U.K. central bank chief told CNBC in an interview on Thursday that the outlook for energy prices is “very uncertain” but a “a long lived effect” of this kind will likely see price growth feed into the rest of the economy and embed inflation more deeply. <\/p>\n
“This is what we’d call a negative supply shock. In other words, unfortunately, the increase in price of energy product… is also having…a negative effect on activity in economy,” he said. “That’s a difficult combination.” <\/p>\n
It came after the bank’s Monetary Policy Committee voted in an 8-1 split to maintain the benchmark rate, known as the “Bank Rate”, at 3.75%, with known hawk BOE Chief Economist Huw Pill the only dissenter voting for a 25 basis-point increase.\u00a0<\/p>\n
Bailey struck a hawkish note, warning that a protracted energy price crunch could force BOE to take action on monetary policy. <\/p>\n
“If we see this pass through \u2013 becoming embedded and becoming persistent \u2013 we will have to respond, because that’s our job and that’s how we get inflation back to target,” he added.\u00a0<\/p>\n
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Bailey told CNBC that reaching the committee’s 2% inflation target is “critically important”, and the bank will be monitoring how energy prices are feeding through into the economy, labor market, and employment data.<\/p>\n
March’s inflation print showed the consumer price index rose to 3.3%, up from 3% in the previous month, as fuel prices pushed the overall basket higher.\u00a0<\/p>\n
The BOE said Thursday that inflation is “likely to be higher later this year as the effects of higher energy prices pass through” and that it was wary of second-round effects \u2014 such as workers demanding higher wages in the face of higher living costs, potentially fueling more inflation \u2014 in the economy.<\/p>\n
Prior to the war, a series of interest rate cuts were expected in 2026, but those predictions have since reversed, with the expectation that the BOE could hike rates later this year.<\/p>\n
\u2014 CNBC’s Holly Ellyatt also contributed to this report.<\/p>\n