BoE should not overreact to 'temporary' rise in inflation, says Bailey

The Bank of England should not overreact to a "temporary" rise in inflation, Governor Andrew Bailey said on Thursday.

In an annual speech to financial services leaders at Mansion House, Bailey said: "It is important not to overreact to temporarily strong growth and inflation, to ensure that the recovery is not undermined by a premature tightening in monetary conditions.

"But it is also important that we watch the outlook for inflation very carefully, which of course we do at all times, particularly for signs of more persistent pressure and for a move of medium term inflation expectations to a higher level."

Bailey added that if the Bank sees those signs, it will be prepared to respond "with the tools of monetary policy".

The pound fell after Bailey’s comments and by 1045 BST, was trading down 0.4% against the dollar at 1.3783 and 0.3% lower versus the euro at 1.1628.

Chris Beauchamp, chief market analyst at IG, said: "Such a policy sounds sensible, but of course is much harder to implement in practice, when monthly CPI data keeps erring on the hot side and markets and the media are full of people warning about uncontrolled inflation and the spectre of the 1970s.

"Unsurprisingly these headlines have not been great for the pound, which is moving below its mid-June low against the dollar as markets bet on a policy divergence between the BoE and the Fed."