By David Milliken and Phoebe Seers
LONDON, April 1 (Reuters) – Bank of England Governor Andrew Bailey said on Wednesday that markets were still getting ahead of themselves by pricing in interest rate hikes by the central bank in response to the hit to the British economy from the Iran war.
Bailey, speaking to Reuters at the central bank’s London headquarters, said the central bank would need to keep a clear focus on risks to growth and jobs as well as inflation when making its next decision on rates.
“We will have to, obviously, act on monetary policy if we think it’s appropriate to do so. But it strikes me, and it still strikes me today, that the most important thing to do is to tackle the source of the shock,” he said.
“Of course, we have to deal with the shocks that come our way. But our remit is very clear on this that … we have to do so in a way that … causes the least damage in terms of activity in the economy and in terms of jobs,” Bailey added.
Financial markets are currently pricing in two rate hikes by the BoE this year – and have previously priced in as many as four – while most economists polled by Reuters expect rates to stay on hold.
“(The market)’s still pricing us to raise rates. I would still say that is a judgment markets have to make but I think they’re getting ahead of themselves,” Bailey said.
Before the crisis, British inflation was on course to fall back to its 2% target and the BoE had said cutting rates further was likely. That changed dramatically with the start of the Iran war.
Bailey said the BoE was looking at a sharp rise in inflation expectations “very carefully” but the message he had received from businesses was that they had limited ability to raise prices.
“Businesses consistently say to me that they’re operating in a context of an absence of pricing power,” he said.
(Writing by David MillikenEditing by William Schomberg)
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