Bank of England Governor Andrew Bailey is holding firm that the UK has yet to see significant second-round inflation effects, while staying cautious on forward guidance as policy uncertainty builds before the September 17 rate decision.

Speaking on Friday at the Jackson Hole economic symposium in the US, Bailey said the UK labour market has continued to soften and that second-round inflation effects remain "relatively muted." He added, "I think for now we can continue to watch this situation." It marks his first public comments on monetary policy since the July 30 meeting.

Despite Bailey's dovish tone, market bets on further tightening have clearly intensified. Traders have now fully priced in a 25-basis-point hike this year and are also wagering on another increase by spring, with short-dated UK gilts underperforming their US counterparts.

Meanwhile, policymaker Catherine Mann warned at the symposium about potential spillovers from the US and the rising dominance of the dollar on the transmission of UK monetary policy.

Bailey Sticks to Wait-and-See Stance, Resists Rate Hike Expectations

Bailey's remarks extend his public position following the July rate decision, when he voted 6-3 to hold rates steady and later told the press, "Please do not leave this room thinking the Bank of England is moving toward a rate hike."

At Jackson Hole, Bailey repeated that message, noting second-round inflation effects are "relatively mild" and the labour market has been weakening. He also stressed that the BOE is assessing policy meeting by meeting and remains wary of forward guidance.

"The problem with forward guidance is that it tends to make unconditional statements about policy, and that's where the danger lies," Bailey said, citing agreement with Federal Reserve Chair Warsh's views expressed earlier at the same event.

Inflation Data and Labour Market Diverge

The core driver behind rising rate expectations is firmer inflation data. The latest UK CPI showed inflation ticking up for the first time since March, largely due to energy price increases triggered by the Iran conflict.

Consumer confidence surveys show households' one-year-ahead inflation expectations rose to 3.9% in August, roughly double the BOE's target.

At the same time, European Central Bank officials have leaned toward a second rate increase since the conflict began, with euro-area inflation hovering near 3% amid stronger-than-expected growth. The prolonged US-Iran conflict is heightening the risk that the global energy shock will morph into a broader inflation crisis.

However, UK labour market signals are clearly diverging from the inflation trend. Companies are cutting jobs, vacancies have fallen to a five-year low, and private-sector wage growth continues to slow. Bailey pointed to these factors as supporting his cautious optimism on second-round effects, while conceding, "I cannot promise this situation will persist."

Mann Warns of New Risks from Dollar Dominance

The BOE is not a monolith. Catherine Mann, one of the minority who voted for a hike in July, warned in a Jackson Hole interview about spillovers from the US before focusing at the symposium on the deeper risk of rising dollar dominance.

"The monetary policy implication is that transmission could be potentially weakened," Mann said. She noted that the pound's geopolitical and institutional erosion relative to the dollar is making it harder for the BOE to manage the UK economy.

Mann's comments contrast sharply with Bailey's tone, revealing deep divisions within the BOE's policy committee over the pace of rate hikes and external risk assessment. With the September 17 decision approaching, market positioning on the BOE's policy path is likely to remain split.