Bailey Signals UK Rate Hikes Are Unlikely Despite Sticky Inflation

Speaking at the Reykjavik Economic Conference in Iceland on Friday 29 May 2026, Bank of England governor Andrew Bailey delivered some of his most explicit guidance yet on how the Monetary Policy Committee plans to navigate the inflation shock caused by the conflict in the Middle East.

His core message: the Bank is prepared to let inflation run above its 2% target for a period, rather than hike Bank Rate, so long as the shock does not embed itself in wages and prices.

"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. But that tolerance would weaken if signs of second-round effects begin to emerge."

Bailey was explicit that the Bank has not been passive. Before hostilities broke out in late February 2026, markets were pricing in a string of cuts to Bank Rate. Those expectations have now been almost entirely removed — which Bailey argued is itself a form of tightening.

"We have already tightened policy considerably in response to the shock relative to what had been expected by markets. Key quoted rates on mortgages have increased since the onset of the conflict."

In other words: the market has done the Bank's job for it. Swap rates and gilt yields — the wholesale costs that drive fixed mortgage pricing — have already moved higher, so there is less need for the MPC to formally raise the headline rate.

Before the conflict, UK CPI inflation had been on course to return to around 2% from April. Instead, the April reading came in at 2.8%, and Bailey warned prices are "likely to go higher" as utility bills rise and firms pass through energy costs.

The driver is well documented in our Middle East conflict and UK inflation analysis: sustained disruption to shipping through the Strait of Hormuz has pushed up global oil and gas prices, and the UK — a net energy importer — feels that quickly in household bills and at the petrol pump.

The key risk for policymakers is second-round effects — a scenario in which higher prices prompt workers to push for higher wages, businesses raise their prices in turn, and inflation becomes embedded at an elevated level.

Bailey acknowledged this would materially alter the MPC's stance, noting "protracted indirect effects could keep inflation above target for too long unless monetary policy responds." For now, the weakness of the labour market is providing cover. Bailey said the decision to hold rates reflected a judgement that "continued weakness in the UK activity and the labour market is likely to lessen the strength of second-round effects from higher energy prices."

For borrowers, Bailey's remarks carry two practical implications:

• A rate hike is not imminent. If you are on a tracker or variable deal, the immediate threat of higher payments from a BoE move has receded.
• Sharp falls in fixed rates also look unlikely soon. With inflation sticky and cuts now priced out, fixed mortgage rates will probably stay close to current levels until the inflation picture improves.

If your deal ends in the next six months, our remortgage guide explains how to lock in a rate up to six months early and switch down if rates improve. Free initial advice from one of our advisers takes around 15 minutes — see our fee policy for full detail on when a fee may apply.

Matty Stevens, mortgage adviser at The Mortgage Genie, gave his take on what Bailey's comments mean for clients sitting on the fence:

"What Bailey said in Reykjavik is significant for anyone waiting for rates to drop before they remortgage or buy. The Bank has effectively told the market: don't expect cuts any time soon, but don't expect hikes either. That's a fairly stable backdrop — and for borrowers, stability is what allows you to plan."

"I'm having a lot of conversations with clients who've been holding off, hoping fixed rates fall further. My honest view is: the next move in pricing depends entirely on whether wages catch up with energy prices. If they do, fixes go up. If they don't, we drift sideways. In either scenario, sitting on a Standard Variable Rate while you wait is the most expensive option — and the easiest one to fix."

"My advice is simple: if your deal ends within six months, get a rate locked in now. You can usually switch down if something better appears before completion. If your deal has a year or more to run, focus on overpayments and getting your credit profile in the best shape possible — that's what will get you the sharpest rate when you do come to remortgage."

Speak to Matty or one of our advisers about your remortgage →