Bank of England Governor corrects: The market is betting on rate hikes too quickly; inflation cannot sacrifice employment.

Bank of England Governor Bailey said that the financial markets' current expectations for the central bank to curb inflation by raising interest rates are "overzealous." Bailey said in an interview that policymakers need to control inflation in a way that causes "minimal damage to economic activity and employment." All nine members of the Bank of England's Monetary Policy Committee voted unanimously last week to keep interest rates unchanged and stated that they are "prepared to take action" at any time to address any inflation surge that may arise from the conflict in the Middle East. Traders expect the Bank of England to raise interest rates twice before the end of the year, by 25 basis points each time, against the backdrop of soaring car fuel costs and experts warning of a substantial increase in household energy bills. Earlier, after the Bank of England stated last month that it was "prepared to take action on inflation," the market once priced in up to four interest rate hikes. Regarding the market's pricing, Bailey said, "I still think these are judgments that markets have to make, but I think they are overzealous." He said, "If we think it's appropriate, we must of course take action on monetary policy. But in my view, and still today, the most important thing is to address the source of the shock." He also pointed out that businesses have limited pricing power to pass on cost increases to consumers. Bailey's remarks are in line with the views of other members of the Bank of England's Monetary Policy Committee. Several committee members expressed doubts about the risk of the conflict in the Middle East causing a spiraling rise in prices and emphasized the downside risks facing the economy's growth and employment. The shadow of inflation is once again looming over the Bank of England due to the impact of the conflict in the Middle East pushing up energy prices. With inflation still above target and the possibility of a rebound due to energy shocks and weak economic growth, the Bank of England is facing a difficult situation - whether to continue easing to support economic growth or turn to tightening to curb inflation. When the UK faced a major energy shock due to the Russia-Ukraine conflict in 2022, the Bank of England significantly raised interest rates to curb soaring inflation. But this time, the situation is different. Four years ago, inflation was driven by an overheated economy - at the time, the UK's unemployment rate was at its lowest level in 48 years, job vacancies were at a record high, wage growth was the fastest since the turn of the century, households had savings accumulated during the pandemic to consume, the government was stimulating demand, and interest rates had just risen from their historic low of 0.1%. The current situation, however, is entirely different. While the conflict in the Middle East has caused severe volatility in the energy markets and intensified concerns about a return of inflation, the UK's unemployment rate is rising, job vacancies are decreasing, economic growth is stagnating, and both monetary and fiscal policies are restraining economic activity. In 2022, policies were akin to "stepping on the accelerator," with a sharp brake being an obvious response as inflation soared to 11.1%. Now, policies are already in a "braking mode."