Bank of England Governor Andrew Bailey has announced that the central bank is in no particular hurry to raise interest rates, citing the ongoing uncertainty surrounding the Iran war and the UK's persistently weak growth rate. In a move that suggests borrowing costs will remain at 3.75% through at least the summer, Bailey stated that it's tolerable for inflation to stay above the Bank's 2% target during the current crisis - though he warned that this patience would evaporate if price increases start looking more permanent than a seasonal sale at Waitrose.

"Given the context of softness in the real economy and uncertainty around the scale and duration of the shock, tolerating temporarily above-target inflation to provide some support for the real economy is an appropriate way to approach the trade-off," Bailey said at a conference in Reykjavik, hosted by Iceland's central bank. He added that this tolerance would weaken if signs of second-round effects begin to emerge - which is central banker speak for "we'll panic later."

At the start of the year, financial markets had expected the Bank to cut interest rates twice this year to 3.25%. Since the Iran war began, that outlook has reversed, and markets now forecast a 0.25 percentage point rise to 4% before December. Bailey noted that the economic situation has deteriorated since the US and Israel started bombing Iran, and that the Bank must monitor the situation closely. Central banks worldwide have struggled with the shock increases in energy costs sparked by the conflict.

The Federal Reserve, under pressure from President Donald Trump, was expected to reduce rates this year but is now forecast to hold steady after the new Fed chair, Kevin Warsh, took the helm on 22 May. Meanwhile, European Central Bank policymakers have signalled a likely rate rise in June, after cutting rates more aggressively than the Bank of England before the Middle East conflict.

Bailey offered one reason for the Bank's patience: borrowing costs have already risen for homeowners and businesses without the central bank lifting a finger. Mortgage costs have increased since hostilities broke out as lenders reversed their expectations of rate cuts, dampening the housing market. Hedge funds and other financial institutions lending to businesses have also increased borrowing rates. "We have, in effect, tightened policy in my view," Bailey said. "I was quite clear that I thought we probably would cut rates once or twice this year. That's off the table."

He noted that the cost of new five-year fixed-rate mortgages has risen by about 1 percentage point, which is obviously a tightening of financial conditions. Rising borrowing costs have also increased the cost of financing the government's £2 trillion debt load, though Bailey said this trend has eased in recent weeks.

Bailey acknowledged there was a hangover from the inflation spike in 2022 after the Russian invasion of Ukraine, which sent inflation soaring into double figures. However, he assured that the central bank is now better prepared to assess the likely impact of rising energy costs, having adopted scenario planning. The Bank now highlights the wide range of factors that could turn a temporary increase in inflation into something more permanent, meaning it's unlikely to allow a repeat performance without swift action. So, you know, progress.