Leadership1 publisherNot yet confirmed elsewhere2 min readPublished
Bailey urges governments to keep budgets credible enough to hold off risk premia
Bank of England governor Andrew Bailey said credible budgets can curb risk premia in a Middle East conflict, as 10-year gilts near 5.5% from 4.2% in March. For companies, Chancellor John Healey's Budget this month now affects borrowing costs alongside the Bank's next rate move.
The Board Room · Leadership desk
What happened
- Bailey said fiscal rules can play an important role in securing price and financial stability, just as inflation targets do.
- UK inflation was 3.1% in the year to August, above the 3% level at which the governor must write to the Chancellor to explain it.
- The Bank expects inflation to rise above 4% in the coming months because the UK is exposed to high global energy prices.
- Bailey said heavy borrowing behind AI investment had raised risks, though he said markets had not become disorderly.
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Why it matters
- decision A company choosing whether to fix long-term debt before or after the Budget is betting on how markets judge Healey's fiscal commitments, as well as on the rate meeting that follows.
- constraint Healey's support for households and businesses has to fit inside a debt interest bill the gilt rise has already enlarged, and on Bailey's test, support that markets judge loose would raise that bill further.
- exposure Pay settlements become part of the rate outlook. Bailey said that if households and firms build the energy shock into wages and prices, the temporary effect turns persistent and the Bank loses its case for looking through it.
Bailey described the risk premium as something a shock brings out and a credible commitment holds back. "A continued commitment to the policy stance can then help to control the emergence of risk premia, something that is likely to happen otherwise when a major conflict in the Middle East breaks out," he said [4]. Brent crude has already moved, from $90 to over $100 a barrel in the last month, City AM reported [9]. That is a rise of more than 11% [20].
A borrower can check his argument in the gilt market. Ten-year gilts, which set the benchmark for what the UK government pays to borrow, yielded around 4.2% in March and now yield nearly 5.5% [13]. The rise is about 1.3 percentage points [21]. It leaves the benchmark roughly 1.5 points above the 4% Bank rate widely expected at the next meeting [12][22]. According to City AM, the climb has added billions to the Chancellor's debt interest bill [14].
City AM's report does not break that rise down between a higher expected path for Bank rate and a premium for fiscal risk. Bailey's claim is that governments control the second part [4]. Until the Budget is out, I'd treat the gap between the gilt yield and Bank rate as unexplained. If yields fall back after Healey speaks, I would change that view quickly.
The Budget comes first. Chancellor John Healey presents it later this month [11], and the Bank meets a week later [12]. So the rate committee will decide with the Budget already in front of it. The rate decision is a question for this month. Whether markets believe the fiscal commitments is a question for the full term of any loan a company signs this quarter.
Bailey also raised the objection to his own speech. He said it was not for him to "comment on fiscal policy and thereby cross the line beyond central banking" [3]. A skeptic would reply that urging governments towards disinflationary tax and spending measures [1] is exactly that comment. The passage that follows sets a test of credibility and leaves the stance to ministers. "Whatever the stance of fiscal policy is, it must be credible and direct to that stability, and seen to be as such by markets," he said [2]. He spoke at the Istanbul Economic Forum, as governor and as chair of the global Financial Stability Board [6]. City AM called the remarks timely reading for Healey [19].
What to watch
- Gilt yields in the week after Healey's Budget: a fall from near 5.5% would suggest markets accept the fiscal commitments, while a further rise would fit the premium Bailey described.
- Whether the Bank's statement at the meeting a week after the Budget refers to fiscal policy when it explains its rate decision.
- Winter pay settlements, which Bailey's own test makes the measure of whether the energy shock stays temporary.
Clarity's read
What the record supports and how the coverage leans. The claims behind it follow.
Reality
- Evidence55
- Adoption
- Insufficient
- Hype gap+15
- Incentives40
- Confidence50
Claim ledger
Ranked by verification strength, evidence, and original report placement.
- [1]
Andrew Bailey said governments should look to help keep prices stable and win over markets with disinflationary tax and spending measures.
- [2]
"Whatever the stance of fiscal policy is, it must be credible and direct to that stability, and seen to be as such by markets."
- [3]
Bailey said it was not for him to "comment on fiscal policy and thereby cross the line beyond central banking".
- [4]
"A continued commitment to the policy stance can then help to control the emergence of risk premia, something that is likely to happen otherwise when a major conflict in the Middle East breaks out."
- [5]
"Such commitments are needed more than ever when these negative shocks occur. Fiscal rules can have an important role to play in securing this outcome, just like inflation targets."
- [6]
Bailey, who is also chair of the global Financial Stability Board, gave the remarks at the Istanbul Economic Forum.
- [7]
The Bank of England is mandated to keep CPI inflation at 2%, and the governor must write to the Chancellor to explain whenever inflation exceeds 3%; UK inflation in the 12 months to August was 3.1%.
- [8]
The Bank expects inflation to rise above 4% in the coming months as the UK is exposed to high global energy prices.
- [9]
Brent crude jumped from $90 to over $100 a barrel in the last month.
- [10]
"[A] 'look-through' approach only works if inflation expectations stay anchored to target," Bailey said.
- [11]
Chancellor John Healey's Budget is due later this month.
- [12]
The Bank is widely expected to raise interest rates to 4% at its next meeting, a week after the Budget.
- [13]
The 10-year gilt yield, the benchmark for UK government borrowing costs, has climbed from around 4.2% in March to nearly 5.5%.
- [14]
The rise in the 10-year gilt yield has added billions to Healey's debt interest bill.
- [15]
Healey faces a battle reining in government spending amid higher debt interest payments while also delivering cost-of-living support to households and support to businesses.
- [16]
Bailey said high levels of leverage used for AI investments increased risks, although markets had not become "disorderly".
- [17]
"We can't in any way be relaxed about the current state of financial markets," Bailey said.
- [18]
"If households and firms start building this shock into their wage and price setting behaviour, this temporary effect quickly turns into a persistent effects."
- [19]
City AM described Bailey's comments as timely reading for Chancellor John Healey ahead of the Budget.
- [20]
Brent's move from $90 to over $100 a barrel is a rise of more than 11%.
- [21]
The 10-year gilt yield has risen by about 1.3 percentage points since March.
- [22]
At nearly 5.5%, the 10-year gilt yield sits roughly 1.5 points above the 4% Bank rate expected at the next meeting.
Sources
1 independent publisher whose own reporting we read for this story.
- cityam.comBailey: Governments must help control inflation too
1 article · October 8, 2026
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