MediumIV Macro Policy & Sovereign Debt16 October 2026, Friday
Bailey finds second-round price pressure weak, keeping a November hike in play
Speaking in Bangkok on 16 October, Bank of England Governor Bailey said the second-order effects of energy prices on broader prices had so far been limited. The Bank is holding its rate at 3.75%; most economists in a Reuters poll expect a hike in November.
Bailey said the pass-through of the energy shock to wages and services prices, the second-order effect, had so far been quite subdued, but that it was too early for a firm judgement. He said companies were focusing on cutting costs and struggling to pass high energy costs on to prices. UK inflation stood at 3.1% in August, above the 2% target. In September the Monetary Policy Committee held the rate at 3.75% by a 6–3 vote, with Bailey in the majority.
The Bank has not changed rates since the US–Iran war began in February. Most economists in the Reuters poll expect the hiking cycle to start in November. Committee members have warned that waiting for clear evidence, such as wage settlements in early 2027, could leave them behind the curve. The previous week, some UK government bond yields had climbed to their highest levels since 1998.
Growth data strengthen the committee's hand. Figures released on 15 October showed the economy grew 0.1% month on month in August, against expectations of a 0.1% contraction. Industrial production rose 0.8% and manufacturing 1.2%, and annual growth reached its strongest level since October 2022. Bailey said the economy had been more resilient than expected. Sterling hit a three-week high of 1.3349 against the dollar on 16 October, gaining more than 1% in two days.
Talay assessment
Bottom line
Bailey may see second-order effects as weak, but growth defying the expected 0.1% contraction widens the committee's room for a November hike. Unlike the ECB and the Fed, the UK has so far not met the energy shock with rates; that divergence could close in November. September's 6–3 split suggests the decision will come by a narrow margin.
Likely effects
- Gilt marketNegativeWeeks
Hike expectations keep front-end gilt yields elevated; at the far end of the curve, yields unseen since 1998 add pressure if they combine with fiscal worries.
- SterlingPositiveWeeks
Stronger-than-expected growth and November hike expectations support sterling; the three-week high of 1.3349 reflects that pricing.
- TürkiyeNegative1–6 months
If the UK joins the tightening, the global rate differential that supports emerging-market currencies narrows, limiting the CBRT's room to cut from the external side.
Possibilities, ranked
- 1First hike in November55%
The committee raises the rate by 25 basis points in November, again with a split vote.
Watch: September inflation rising above 3.1% and the vote split at the November decision
- 2Wait extends35%
The view that second-order effects remain weak prevails, and the committee waits until early 2027 for evidence.
Watch: A slowdown in wage growth and services inflation
- 3Aggressive tightening10%
Energy prices spike again and the committee hikes at consecutive meetings from November.
Watch: Gilt yields breaking above their 1998 highs again
Probabilities are calibrated judgement based on the sources, not measurement, and are revised as new information arrives. Not investment advice.
Market reaction
Indicators affected
- Sterling/dollar▲ 1.3349
- UK GDP, month on month▲ +0.1%
Sources
- RTÉ (Reuters) — BoE's Bailey sees 'subdued' second-round price pressures
- AOL (Reuters) — Bank of England's Bailey sees 'quite subdued' second-round price pressures so far
- FXStreet — United Kingdom GDP grows by faster than expected in August
- FXStreet — British Pound hits three-week highs near 1.3350 as the US Dollar tumbles