Interest rates will have to be raised higher than initially hoped in the face of inflationary pressures, the Bank of England (BoE) governor has suggested.
Speaking at an International Monetary Fund event in Washington, Andrew Bailey also said there had been “a very clear and immediate meeting of minds” with new Chancellor Jeremy Hunt on the need for financial stability and the measures to achieve it.
He added it was an error to “fly blind” by not accompanying the “fiscal event” with an economic forecast by the Office for Budget Responsibility (OBR), which many argue sent the financial markets into turmoil.
The BoE is due to announce its next decision on interest rates, which will impact household mortgages, on 3 November and many investors think it will either raise them from their current level of 2.25% to 3% or possibly 3.25%, both of which would be much bigger moves than usual.
Mr Bailey said: “We will not hesitate to raise interest rates to meet the inflation target.
“And, as things stand today, my best guess is that inflationary pressures will require a stronger response than we perhaps thought in August.”
The bank previously predicted the rate of inflation would peak at 11% in October, while its goal was 2%.
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Mr Bailey said the bank would assess the impact of the government’s energy support scheme and the 31 October budget statement of Mr Hunt, who took up the role on Friday after Kwasi Kwarteng was sacked following the economic chaos fuelled by his unfunded tax cut plans.
He added: “The MPC (Monetary Policy Committee) will respond to all this news at its next meeting in just under three weeks from now.
“This is the correct sequence in my view. We will know the full scope of fiscal policy by then.”
Image: Andrew Bailey says there is a ‘meeting of minds’ with the new chancellor. Pic: HM Treasury
In a further major U-turn on Friday, Prime Minister Liz Truss scrapped a freeze in corporation tax and said she would instead allow it to rise from April, as planned by Boris Johnson’s government.
Mr Bailey said: “I can tell you that I spoke to Jeremy Hunt, the new chancellor, yesterday (Friday).
“I can tell you that there was a very clear and immediate meeting of minds between us about the importance of fiscal sustainability and the importance of taking measures to do that.
“Jeremy is now working on what will be the fiscal statement. It’s not for me and it’s not appropriate for me to constrain the choices he makes.
“But a very clear message I would give, and it’s a clear message for everybody, including a clear message for markets.
“I can tell you there is a very clear and immediate meeting of minds on the importance of stability and sustainability.”
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2:08
‘It was a mistake to fly blind’
Mr Bailey also indicated his concerns over the direction taken by the former chancellor, pointing to a statement he issued in the wake of the mini-budget.
He said: “I felt I had to. It’s not something I make a habit of doing but given the situation.
“I also don’t make a habit of commenting on fiscal policy as a rule, because that’s not my job.
“But I made two points on fiscal policy… which are of clear relevance to the central bank.
“One was to emphasise the importance of sustainability of fiscal policy and the second, which was part of that, was to emphasise the need to have the Office for Budget Responsibility involved – that flying blind is not the way to achieving sustainability.”
Mr Bailey said the bank was able to operate monetary policy – chiefly interest rates – to manage the economy and also make financial stability interventions to address issues such as the recent surge in British government bond yields that threatened some pension funds.
The BoE ended its emergency bond-buying on Friday.
“In these difficult times, we need to be very clear on this framework of intervention,” Mr Bailey said.
Donald Trump has revealed a list of more nations set to face delayed ‘liberation day’ tariffs from 1 August.
He has threatened tariffs of 30% on Algeria, 25% on Brunei, 30% on Iraq, 30% on Libya, 25% on Moldova and 20% on the Philippines. Sri Lanka was later told it faced a 30% duty.
Letters setting out the planned rates – and warning against retaliation – are being sent to the leaders of each country.
They were the latest to be informed of the president‘s plans after Japan and South Korea were among the first 14 nations to be told of the rates they must pay on their general exports to the US from 1 August.
The duties are on top of sectoral tariffs, covering areas such as steel and cars, already in place.
Mr Trump further warned, on Tuesday, that a 50% tariff rate on all copper imports to the US was looming.
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He has also threatened a 200% rate on pharmaceuticals and is also expected to take aim at all imports of semiconductors too.
The European Union, America’s largest trading partner in combined trade, services and investment, is expected to get a letter within the next 48 hours unless further progress is made in continuing talks.
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2:49
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The bloc, which Mr Trump has previously claimed was created to “screw” the US, has been in negotiations with US officials for weeks and working to agree a UK-style truce by the end of the month.
The EU has retaliatory tariffs ready to deploy from 14 July but it is widely expected to delay them until such time that any heightened US duties are imposed.
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Trump to visit UK ‘in weeks’
It remains hopeful of a deal in the coming days but European Commission president Ursula von der Leyen told the European Parliament: “We stick to our principles, we defend our interests, we continue to work in good faith, and we get ready for all scenarios.”
While the UK’s so-called deal with Mr Trump is now in force, it remains unclear whether steelmakers will have to pay a 50% tariff rate, deployed by the US against the rest of the world, as some final details on an exemption are yet to be worked out.
The value of its shares has risen by 409,825% since its market debut in 1999.
Its status has been cemented thanks to the rush for AI technology – suffering several wobbles along the way – but nothing significant when you refer to the percentage rise of the past 26 years.
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The most recent pressures have come from the emergence of the low-cost chatbot DeepSeek and concerns for global AI demand as a result of Donald Trump’s trade war hitting growth.
Financial markets have been taking a more risk-on approach to the trade war since the delays to “liberation day” tariffs in April.
It’s explained by a market trend that’s become known as the TACO trade: Trump always chickens out.
Image: The milestone is reported by Sky’s US partner CNBC, seen on screens at the New York Stock Exchange. Pic: Reuters
It has helped US stock markets post new record highs in recent days.
The wave of optimism is down to the fact that the president is yet to follow through with the worst of his threatened tariffs on trading partners.
Corporations are also yet to report big hits to their earnings – a fact that is also propping up demand for shares.
If Mr Trump does go all-out in his trade war, as he has now threatened from 1 August, then that $4trn market value for Nvidia – and wider stock markets – could be short-lived, at least in the short term.
But market analysts believe Nvidia’s value has further to go.
Matt Britzman, senior equity analyst at Hargreaves Lansdown, said of its meteoric rise: “Once known for powering video games, NVIDIA has transformed into a foundational player in AI infrastructure.
“Its high-performance chips now drive everything from natural language processing to robotics, making them essential to training and deploying advanced AI models.
“Beyond hardware, its full-stack ecosystem – including software platforms and developer tools – helps companies scale AI quickly and efficiently. This end-to-end approach has positioned Nvidia as a cornerstone in a market where speed, scalability, and efficiency are critical.”
He added: “The key question is where it goes from here, and while it might seem strange for a company that’s just passed the $4trn mark, Nvidia still looks attractive.
“Growth is expected to slow, and it’s likely to lose some market share as competition and custom solutions ramp up. But trading at a relatively modest 32 times expected earnings, and over 50% top-line growth forecast this year, there’s still an attractive opportunity ahead.
“For investors, it remains a compelling way to gain exposure to the AI boom – not just as a participant, but as one of its architects.”
The future of the UK economy is weaker and more uncertain due to President Trump’s tariffs and conflict in the Middle East, the Bank of England has said.
“The outlook for UK growth over the coming year is a little weaker and more uncertain,” the central bank said in its biannual health check of the UK’s financial system.
Economic and financial risks have increased since the last report was published in November, as global unpredictability continued after the announcement of country-specific tariffs on 2 April, the Bank’s Financial Stability Report said.
These risks and uncertainty, as well as geopolitical tensions, like the wars in Ukraine and the Middle East, are “particularly relevant” to UK financial stability as an open economy with a large financial sector, it said.
Pressures on government borrowing costs are “still elevated” amid significant doubts over the global economic outlook.
Had a 90-day pause on tariffs not been announced, conditions could have worsened, the report added.
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The chance of prices rising overall has also grown as tensions between Iran and Israel and the US threaten to push up energy prices.
Possible higher inflation in turn raises the prospect of more expensive borrowing from higher interest rates to bring down those price rises. This compounds the pressure on state borrowing costs.
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1:42
Trump’s tariffs: What you need to know
Mortgages
Borrowing costs for about 40% of mortgage holders are set to become costlier over the next three years as households refix to more expensive deals, affecting 3.6 million households, the Bank said.
Many homes have not refixed their mortgage since interest rates began to rise in 2021, meaning the full impact of higher rates has yet to filter through.
Those looking to get on the property ladder got a boost as the Bank said lenders could issue more loans deemed to be risky, meaning people could be able to borrow more.
Financial institutions can now have 15% of their new mortgages deemed risky every year, up from the current 9.7%.
Riskier mortgages are those with a loan value above 4.5 times the borrower’s income.
Be ‘prepared for shocks’
Despite the global and domestic economy concerns, the outlook for UK household and business resilience remained “strong”, the Bank said.
Investors, however, were warned that there could be “sharp falls in risky asset prices”, which include shares and currencies.
If there are any vulnerabilities in non-bank lenders, it “could amplify such moves, potentially affecting the availability and cost of credit in the UK”.
“It is important that in their risk management, market participants [people involved in investing] are prepared for such shocks.”
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The steep market reaction following the tariff announcements in April “highlights that the interconnectedness of global financial markets can mean stress from one market can move quickly to others,” the report said.
Overall, though, “household and corporate borrowers remain resilient”, the Bank concluded.