By Reuters

(Reuters) - Bank of England Governor Andrew Bailey said on Friday that allowing inflation to run above the central bank's 2% ‌target is justified given the uncertainty about the impact of the Iran ‌war on the economy and the weak pace of growth.

"But that tolerance would weaken if signs ​of second-round effects begin to emerge," Bailey said, referring to longer-term inflation pressures, in a speech at a conference in Reykjavik organised by Iceland's central bank.

The BoE's Monetary Policy Committee kept interest rates on hold on April 30 as it ‌waited to see the economic ⁠impact of the Iran war, even as the central bank said it expected inflation to climb in response to the ⁠energy price shock from the conflict.

In his speech on Friday, Bailey reiterated comments he made last week in which he said that the BoE had tightened monetary policy ​by ​taking rate cuts off the table "and that ​is already affecting the economy."

"We have ‌to monitor the situation in the Middle East and how it affects the UK economy and inflation very closely and adjust policy as required," he said in Reykjavik.

Bailey and most of his colleagues on the MPC have previously signalled they are in no rush to raise borrowing costs.

By contrast, policymakers at the ‌European Central Bank have signalled a likely ​rate rise in June after it cut rates ​by more than the BoE ​before the war.

Financial markets are fully pricing one BoE quarter-point ‌rate hike over the remainder of 2026 - ​in November - and ​only a roughly one-in-three chance of a second one. In March, investors were pricing more than three hikes.

Bailey welcomed that scaling back of bets ​by investors. "I hope it ‌goes on. I think that will depend on events in the ​Middle East," he said in a question-and-answer session after Friday's speech.

(Writing ​by William Schomberg; Editing by Alistair Smout)

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