Bank of England (BOE) Governor Andrew Bailey downplayed the threat of second-round inflation effects in the UK at the Jackson Hole Economic Symposium, emphasizing that the labor market remains persistently weak and the central bank can continue to observe the situation. However, market traders have fully priced in a quarter-point rate hike this year, and with clear divisions emerging within the committee over the assessment of external risks, policy uncertainty is rapidly intensifying ahead of the September 17 rate decision.

Speaking in an interview at Jackson Hole in the United States on Friday, Bailey said the UK labor market has continued to weaken, that second-round inflation effects are “fairly muted,” and added, “I think at the moment we can continue to watch the situation.” This marked his first public statement on the policy outlook since the July 30 monetary policy meeting.

Following the July rate decision, he had explicitly stated, “Please do not leave this room thinking that the Bank of England is moving toward rate hikes.” At that time, Bailey led a 6-3 majority vote to keep rates unchanged. At Jackson Hole, he reiterated this tone, stressing that the BOE is assessing policy on a meeting-by-meeting basis and remains wary of forward guidance.

“The problem with forward guidance is that it tends to drift into making unconditional statements about policy, and that is where the danger lies,” Bailey said, citing and endorsing views previously expressed by Federal Reserve Governor Kevin Warsh at the same venue.

Conflicting Signals: Rising Inflation vs. Cooling Employment

The core factor driving market expectations for rate hikes is the renewed strengthening of inflation data. The latest UK Consumer Price Index (CPI) shows inflation rebounding for the first time since March, with energy price increases triggered by the Iran conflict being the primary driver. Consumer confidence surveys show that in August, residents’ expectations for price increases over the coming year rose to 3.9%, roughly double the Bank of England’s target.

Meanwhile, European Central Bank officials have been leaning toward a second rate hike since the outbreak of the conflict, with eurozone inflation holding near 3% against a backdrop of stronger-than-expected economic growth. The protracted conflict between the US and Iran is heightening the risk that the global energy shock could evolve into a broader inflation crisis.

However, UK labor market signals are diverging markedly from the inflation trajectory. Businesses are cutting jobs, job vacancies have fallen to five-year lows, and private-sector wage growth continues to slow. Bailey noted that these factors support his cautiously optimistic assessment of second-round effects, but he also conceded: “I cannot promise that this situation will persist.”

IndicatorCurrent StatusPolicy ImplicationInflation (CPI)First rebound since MarchSupports rate hikeConsumer inflation expectations (next 12 months)3.9%, roughly double the targetSupports rate hikeJob vacanciesFive-year lowSupports holding steadyPrivate-sector wage growthContinuing to slowSupports holding steadyMarket rate hike betsFully priced in a quarter-point hike this yearAnother hike expected next spring

Note: Data compiled from the Bank of England and market surveys.

Committee Divisions Come to the Surface

The Bank of England is not monolithic. Catherine Mann, a minority member who voted for a rate hike in July, warned in a Jackson Hole interview about spillover effects from the United States, and subsequently focused at the symposium on the deeper risk of rising dollar dominance.

“The monetary policy implication is that monetary policy transmission could face potential weakening,” she said. Mann pointed out that the geopolitical and institutional erosion of the British Pound relative to the US dollar is creating greater headwinds for the Bank of England in managing the UK economy.

Her remarks stand in stark contrast to Bailey’s tone, revealing deep divisions within the policy committee over the pace of rate hikes and the assessment of external risks.

On the market reaction front, despite Bailey’s dovish leanings, traders’ bets on rate hikes have clearly intensified. Short-dated UK Gilts have underperformed their US Treasury counterparts, reflecting investors repricing for a more hawkish policy path. With the September 17 decision approaching, market bets on the Bank of England’s policy trajectory are expected to remain divided.