Bailey plays down second-round inflation in Britain as traders price a November rate rise as near certain

Bank of England Governor Andrew Bailey said signs of second-round inflation were limited ahead of next week’s inflation data¹. He has also said that businesses are resisting decisions to pass higher energy costs on to consumers and are instead looking at other options⁵. Bloomberg reported that Bank officials are divided over the inflation risk facing the United Kingdom, and that the coming inflation print can seal the case for a November rate rise².

Markets are not waiting. The market has already priced a 95% chance that the Bank raises rates at its next policy meeting on 5 November³. One foreign-exchange summary put the expectation at a quarter-point rise next month, an outlook that pushed sterling above 1.3350 against the dollar⁴.

Why it matters to investors

There is a gap between what the governor is describing and what the curve is pricing. Bailey’s point is about second-round effects, the stage at which an energy shock turns into wage and price setting behaviour, and his reading is that it has not happened yet¹. The market’s pricing says a rise is coming anyway³. If both hold, the Bank is raising rates against a first-round shock, which is a harder position to defend and a less predictable one to trade.

Equity markets took the defensive route. The FTSE 100 logged its strongest week in six months on a rally in defensive sectors¹. In bonds, yields on US Treasurys and European government debt edged higher, with rates markets weighing whether too many increases are now priced in⁶. The same summary that put sterling’s gain on the board also recorded the dollar index falling to 101.65 as Fed expectations shifted⁴.

For corporates, Bailey’s observation that firms are absorbing energy costs rather than passing them on is the margin story behind the inflation story⁵. Absorbed costs show up in earnings rather than in the consumer price index.

What to watch

Next week’s inflation release, which both the governor and Bloomberg’s account identify as the decisive input^1,2. Whether the division among Bank officials becomes visible in the vote split rather than only in speeches². And whether the pound holds its gain if the data undercut the near-certain pricing^3,4.