Bailey: BoE May Allow Inflation Above 2% Target to Support Weak Economy

The Bank of England could allow inflation to stay above its 2% target for a period if that helps support the UK’s weak economy, Governor Andrew Bailey said, while stressing that policymakers would not tolerate inflation becoming embedded in wages and prices. Bailey’s comments came as the central bank weighs how to balance slowing growth against renewed price pressures, especially from higher energy costs and broader economic uncertainty.

According to Bloomberg’s report, Bailey said the Monetary Policy Committee can accept a temporary overshoot of the inflation target “so long as second-round price effects do not emerge,” a reference to the risk that businesses and workers begin to build higher inflation into pay deals and pricing decisions. The Bank’s April Monetary Policy Report said the target is symmetric, but also noted that trying to keep inflation at target at all times can create undesirable volatility in output when the economy is hit by shocks.

The remarks reflect a difficult trade-off for the central bank. In its April report, the Bank said CPI inflation had already risen to 3.3% and was likely to climb further later in the year as higher energy prices fed through to the economy. The report also said monetary policy may need to be looser if there is more slack in the economy, even as higher inflationary pressures would normally call for tighter policy.

Bailey’s comments also fit a broader message from the Bank that it is focused on preventing short-term price shocks from becoming longer-lasting inflation. The April report said the outlook depends on the scale and duration of the shock, and that policy must ensure inflation returns to target in the medium term. In practical terms, that means the Bank is trying to avoid overreacting to temporary inflation if doing so would deepen weakness in growth and employment.

The debate comes at a sensitive moment for the UK economy, which has shown signs of softness and remains exposed to external shocks. Bailey said in related remarks reported by Bloomberg that the Bank had already tightened financial conditions and that continued weakness in activity and the labor market could reduce the risk of second-round inflation effects. He also said policymakers need to monitor developments closely and adjust policy as required.

Bailey’s interview at a central banking conference in Iceland also touched on broader financial stability issues, including artificial intelligence, private credit and crypto. In separate Bloomberg reporting, he said British banks still do not have access to Anthropic’s new AI tool, Mythos, and that banks are using other models to test cyber defenses, while calling for an international approach to cyber threats.