Expect cooling for the hawkish! Unafraid of soaring oil prices, Bank of England Governor says will not rush to raise interest rates.

On April 16th, Andrew Bailey, the head of the Bank of England, attending the International Monetary Fund (IMF) spring meeting in Washington, stated in a media interview that the Bank of England will not rush to make decisions on raising interest rates in the face of energy price shocks caused by the Iran war. Bailey's remarks come at a time when global oil prices are high and the UK's economic growth expectations have been significantly downgraded, highlighting the policy dilemma for major central banks in dealing with a new round of supply shocks. Bailey: Current decisions are "very, very difficult," will not rush to raise rates According to reports, Bailey explicitly stated in the interview that the rise in oil and gas prices will undoubtedly feed into overall price levels. However, due to the intertwining of multiple uncertainties, making a decision on interest rates at this point has become "very, very difficult." Bailey further explained, "Indeed, we need to make some very difficult judgments. We will not rush to conclusions on these issues because there is a lot of uncertainty - not only about how things will evolve, but also about how these changes will be transmitted and impact the UK economy." Market analysts point out that Bailey's statement is intended to cool down the aggressive expectations for rate hikes in the current financial markets. Back in March when the Bank of England decided to keep rates unchanged, Bailey warned that the market's expectations for future rate hikes were "overreacting" and "too early." Macro background: Oil prices exceeding $100 and IMF's "recession warning" Bailey's cautious remarks are not unfounded, as they come amidst a rapidly deteriorating global economic environment. The outbreak of the Iran war has led to the almost blockade of the crucial global energy passage of the Strait of Hormuz, driving Brent crude oil futures prices soaring above $100 per barrel in mid-April. On Tuesday, local time, the latest issue of the IMF's World Economic Outlook report confirmed the seriousness of this impact. The report significantly downgraded global economic growth expectations, citing the surge in energy prices and supply chain disruptions caused by the war. The IMF also issued a stern warning: if the conflict escalates further and oil prices remain above $100 per barrel until 2027, the global economy is at risk of being pushed to the brink of recession. Among the major advanced economies, the UK has suffered particularly severe blows. The IMF has slashed its economic growth forecast for the UK in 2026 from a previous 1.3% to a significant 0.8%, the largest downgrade among the Group of Seven (G7). Meanwhile, the UK's inflation outlook has deteriorated significantly, with the average inflation rate expected to reach 3.2% in 2026, leading in the G7, and not expected to fall back to the target level of 2% until the end of 2027. As the Middle East conflict leads to global energy supply tension, research in the UK has indicated that due to the increase in energy prices, local households could see a reduction of 480 in annual income. The latest study from the Resolution Foundation think tank suggests that the median forecast for household income in 2026, previously estimated to grow by 0.9%, has now been revised to predict a decline of 0.6%. Low-income families are facing even greater impact, with forecast growth of 2.8% now lowered to just 1.2%. This combination of "low growth, high inflation" poses a typical risk of "stagflation" for the UK economy, and is at the core of the "difficult judgments" that Bailey mentioned. Expectations for interest rate hikes face adjustments Despite the surge in energy prices pushing up inflation expectations, there are significant differences within the Bank of England and among market strategists on whether to raise rates immediately. MPC member Megan Greene's recent statement is in line with Bailey's stance. She believes that reducing rate hike expectations in the market is "reasonable," and points out that there is a lag in the transmission of inflation caused by the war - businesses have already been impacted by the rise in energy prices, but consumers will not feel the pressure until prices are adjusted upwards in June. Greene admits that the Bank will need a long time to obtain conclusive data, and by the time the data is available, it may be "too late". Matthew Ryan, a strategist at forex service provider Ebury, is more direct, stating that investors' expectations for an interest rate hike by the Bank of England are "too aggressive." He believes that despite the high energy prices, there is significant slack in the UK labor market, which will effectively limit secondary inflationary effects. Currently, the interest rate futures market has fully absorbed expectations for a 25-basis point rate hike by the Bank of England in 2026, and gives about a 40% probability of a second rate hike before the end of the year. However, following Bailey's latest speech, market bets on an aggressive tightening path have cooled down. Resonance with the European Central Bank: Global central banks enter a "collective caution" phase Bailey's "difficult judgments" are not isolated. At the same IMF spring meeting, Alexander Demarco, a member of the European Central Bank's governing council, also expressed a similar cautious stance. Demarco acknowledged that the euro area's economy may be evolving in a direction that is unfavorable to what the European Central Bank previously envisioned, but he also stressed that decision-makers need to exercise patience and avoid making any hasty decisions. He pointed out that although the market expects the European Central Bank to raise rates twice this year, given the stable long-term inflation expectations and the central bank's high credibility in fighting inflation, there is not a high sense of urgency to take immediate action. The two central bank decision makers speaking in unison in Washington clearly outline the main theme of current global monetary policy - in the face of tremendous geopolitical uncertainty, it is better to exercise caution and wait rather than taking blind action. Bank of England's April 30th interest rate decision will be a key test The Bank of England's next interest rate decision is scheduled for April 30th. At that time, Bailey and his colleagues will have to provide a clear policy response to the current complex macro situation. Analysts generally believe that if there is no further drastic escalation in geopolitical tensions and if oil prices fall in the next two weeks, the Bank of England is likely to choose to maintain the current interest rate level and retain flexibility for future actions in their meeting statement. However, if there are signs of inflation expectations becoming unanchored, a "defensive" mild rate hike is also not entirely impossible. UK Chancellor of the Exchequer Rachel Reeves plans to announce a new plan later this week aimed at helping businesses cope with high energy costs. Timely fiscal policy measures may help alleviate the pressure on the Bank of England to tighten monetary policy in the short term.