Bank of England Governor Andrew Bailey said the central bank may temporarily tolerate inflation running above its two percent [1] target to support the UK economy.

This shift in approach suggests the bank is prioritizing the prevention of a recession over strict price stability. By allowing a temporary spike in inflation, the Bank of England aims to protect a fragile real economy facing significant external pressures.

Speaking Friday during an economic conference in the United Kingdom, Bailey said the decision is driven by softness in the real economy and uncertainty regarding the scale and duration of external shocks [1]. He specifically cited uncertainty from the Iran war and broader Middle East supply shocks as factors weighing on growth [1].

"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 [1].

To maintain this support, the bank is holding interest rates at 3.75% [2]. Bailey said there is no immediate need to move quickly to curb an inflation jump, provided that second-round price effects do not emerge [3].

Despite the decision to hold rates, the bank has warned that inflation could potentially surge above six percent [4]. However, Bailey said allowing inflation to run above the two percent [1] target is justified given the weak pace of growth and the impact of the conflict in Iran [1].

"We may let inflation exceed 2% temporarily to avoid a recession, while holding rates at 3.75%," Bailey said [2].

“Tolerating temporarily above‑target inflation to provide some support for the real economy is an appropriate way to approach the trade‑off.”

This policy pivot indicates a tactical retreat from the Bank of England's strict inflation-targeting mandate. By accepting higher price levels to avoid a recession, the bank is acknowledging that the risks of a deep economic contraction, fueled by geopolitical instability in the Middle East, now outweigh the risks of temporary inflation. The success of this strategy depends on the bank's ability to prevent 'second-round effects,' where temporary price hikes trigger permanent wage-price spirals.