Bank of England's Bailey sees 'quite subdued' second-round price pressures so far

By David Milliken

BANGKOK, Oct 16 (Reuters) - Soaring energy prices so far appear to be having limited wider effects on British prices, but it is too soon to draw firm conclusions about how strong such second-round effects will be, Bank of England Governor Andrew Bailey said on Friday.

Most economists now expect the BoE to start raising rates next month, according to a Reuters poll, after keeping policy on hold since the outbreak of the US-Iran war in February.

Last month Bailey was part of a 6-3 majority on the BoE's Monetary Policy Committee who voted to leave interest rates unchanged at 3.75%, but he said at the time that policy might have to tighten if the risk of second-round effects increased.

Speaking in Bangkok on Friday, Bailey said it appeared too soon to conclude much about second-round effects.

"I think it's too early, but to the extent we've seen evidence, so far it's been quite subdued," he told a meeting of the Institute of International Finance, an industry association.

"When I go around the country, I do a lot of talking to businesses. There's a very big focus on cost-cutting and a very big focus on the difficulty of passing through (higher energy prices)," he added.

Bailey has previously argued that a sharp rise in mortgage rates and other borrowing costs in Britain since the start of the US-Iran war has given the BoE time to consider whether a rate rise is necessary.

But BoE policymakers have also said that waiting for very clear evidence of second-round effects – for example, in annual pay settlements in early 2027 – risks making them too late.

Bailey said Britain's economy "is actually turning out to be more resilient than we expected it to be", especially after August gross domestic product data on Thursday showed the strongest annual growth since October 2022.

Inflation of 3.1% in August remained "enormously frustrating", Bailey said, blaming the overshoot of the central bank's 2% target on conflicts in the Middle East. These conflicts, he added, were also the main factor driving sharp moves in British government bonds, which last week pushed some yields to their highest since 1998.

The IIF meetings are taking place on the sidelines of the annual meetings of the International Monetary Fund and World Bank.