Order, order. Welcome to the Treasury Select Committee on Tuesday, the 8th of September, 2026. We're pleased today to have the Monetary Policy Committee and the Governor of the Bank of England in front of us to discuss the recent rate setting and also just what's going on in the world that's having an impact on the economy. So I'm pleased to welcome, from my left to right, Professor Alan Taylor, who's an external member of the Monetary Policy Committee; the Governor of the Bank of England, Andrew Bailey; the Deputy Governor for Markets and Banking at the Bank of England, Dave Ramsden; and Megan Greene, who's also an external member of the Monetary Policy Committee. So obviously we're going to talk about the rate setting meeting, but I want to touch on the stuff going on in the world. And talking of the world, we're really pleased to welcome special guests from Queensland today to see us in action. And also I think Mr. Bobby Dean has some guests as well.
Yeah, we had some work experience students in my office as well come to observe, and they'll be writing up your performance.
We'll let you know your score out of 10 later.
And I should just say we are slightly light on numbers because a number of our colleagues have been promoted into government roles or PPS roles, and we are still waiting—the pace of elections is not fast here. So no comment on our witnesses, we're just a bit light on our numbers today. So I wanted to start, if I could, with you, Governor. Obviously, last time you were in front of us, we talked quite a lot about the Strait of Hormuz and the impact of the economic repercussions of what's going on there. I mean, look, we're well embedded. This war in Iran is not stopping there. So I really wanted to see if you could just explain how that has had an impact on your thinking, and specifically the difference between crude going through the straits and refined products, and the impact that has, particularly on the second one.
Yes, yes. So that's actually probably one of the developments since we were last here actually, as well, so I'll certainly touch on that. Well, as you say, first of all, it's slightly obvious the conflict is still going on, and it is also causing a high level of energy prices and also quite a bit of volatility in energy prices. That volatility is feeding through into financial markets, and nearly all of that volatility you can trace back to events in the Gulf. I mean, I think it's fair to say that we've got higher energy prices; they could be higher still, I would say. And so a number of things have gone on. The strait obviously remains largely closed. We think some is getting through, but not huge amounts.
As I understand, particularly talking to my opposite numbers—I've just been in Basel this weekend, so I've had conversations with them—more use is being made of pipelines in the area to ship it. But as you saw this weekend, even that's a problem in some way because the Houthis have attacked the Red Sea area, which is where the Saudi pipeline goes to. There have been emergency stock releases, quite big emergency stock releases, and they've obviously helped. Obviously, they can't go on for—I think the current ones run till about November. Probably some increase in production of oil in some other parts of the world. And then, as you say, the other development has been the so-called crack spread, and that's the refined products pricing.
Because, well, I speak for myself, we don't actually consume barrels of oil; we consume the products of barrels of oil. And the crack spread is really the wedge between the crude price and the refined products prices, and that spread is high at the moment. I think one of the reasons for that—and I am not in any sense saying this as a criticism—the Ukrainians of course have been successful in their attacks on Russian refining capacity, and Russia does have quite a concentration of refining capacity. Russia's capacity may be about 60% under its normal capacity, and that is having some effect therefore on the crack spread. There's probably some other things going on, but you're right. Quite a bit of the crack spread is actually not to do with the Straits of Hormuz. I think it's important we recognize here that there are other things. So even if there was suddenly some settlement in the strait, you would still probably have the crack spread issue.
Okay. And so, one of the other aspects of this is that with certain refineries having to take on more work, they're running hot. So are you—have you got anyone looking into the impact, the potential challenge if maintenance is not being able—
That's a concern. I think that's a concern particularly for US refineries. I think they are working at high levels. There has also been the closure, I think, of one or two refineries in the US, which was planned beforehand. So, yes, that's another factor in this which could cause a sustained elevation of the crack spread.
Okay. And I was just going to say, this maintenance point is really interesting because if you'd made assumptions that the conflict was going to go along for a certain amount of time, you might postpone maintenance, but you get to a point where you can't postpone. Plus there's the installations. The Houthi attack hit a refinery, a Saudi refinery. So you're seeing not just those problems of the longer the conflict goes on, the more complicated it gets, both with the original crude, but then these spreads. I mean, just to give you a fact: crude is up about 51% compared with pre-conflict, but diesel is up 118% and jet fuel is up 105%. So that gives you an idea of the crude and then the crack spread on top of that. We talked a lot about this in the July MPR; we had chart 1.7 to really draw attention to this.
Okay, because that was really my next question. How much did that affect each of you in your decisions when you were setting the rate at the last meeting? So I'll start with Professor Taylor.
Yeah, I think it's a very uncertain environment. So when I was last here after the February vote, then we'd had inflation coming down, both core and headline, and a sense that we were coming back to target. I think if you just mechanically asked what would April CPI have been without the energy effects, it would have been at target. So those were reasonable expectations, but since then we've seen the energy price moving in a higher corridor. Oil was at 60 to 70; it's been between 70 and 100. As the Governor said, it could have been much worse. Some experts in March were saying 150 could be within the range of possibilities. The market was a bit more relaxed about that, and the curve didn't go that high. Then we had the hostilities calming down in June and possible ceasefire, so we went to the bottom end of the 70 to 100 range. Now we're edging back up.
So I think it's very difficult to know what the future of geopolitical events will be. And in addition, we're sort of transitioning from that early phase where the release of reserves and certain temporary measures can mitigate price increases. That can't go on forever. But at the same time, we're seeing a shift around the world, probably to firms and households adjusting demand and other supply responses coming in. So that's a race between temporary measures wearing off and the supply and demand responses kicking in. Which one will win, we don't know, and it's very different, of course, for the refined products and then again for gas, which is maybe something else we'll come on to, which is so central to the UK electricity price. So it's a very fragile situation for all kinds of reasons, and I think that's what we have to watch especially carefully going into the winter, especially with gas. It's going to be a very delicate situation, and we've seen that price edging up in recent weeks.
Megan Greene, because of course you voted to increase the rates, so was all of this having an impact on thinking?
It certainly was. Commodity and energy costs have been up and down largely off the back of headlines over the past six months, and so I think we can continue to expect them to be incredibly volatile. It has been six months now, and so that worries me in terms of potential second-round effects down the line. But in the meantime, I can't pretend to have an edge on knowing exactly how this war will play out or exactly how energy prices will evolve accordingly. And so, in my view, we face such incredible uncertainty that it's appropriate to take a risk management strategy when devising the appropriate monetary policy response. And then I think you're looking at how to minimize your losses.
So we've done an exercise looking at, let's say you think energy prices are going to be higher and there will be second-round effects, and it turns out actually energy prices fall, there aren't significant second-round effects: what are the implications for inflation if you course-correct versus the inverse of that? And it turns out that if you think that you might be in a situation with higher energy costs and more second-round effects and act accordingly and determine actually that's not the case, then you can course-correct. You'll stay on top of inflation, and the cost in terms of the output gap is relatively small. Whereas if you assume the inverse and actually you end up with more second-round effects and higher energy costs, it's hard to get on top of inflation.
And on the second-round effects, I mean, there's a challenge because often businesses particularly will have to lock into a price at a certain time. So what time scale are you looking at the impact of this crisis on secondary impacts? Because some people can change—the energy price will have a quicker impact on their business, but in some cases it will be a very slow turnaround.
That's right. And so I think ultimately we won't have definitive evidence on second-round effects for quite some time. I wouldn't be surprised if we don't have conclusive evidence until next year at some point. But ultimately we have to set monetary policy looking into the future given the lags with which monetary policy hits the real economy. And so we have to make a judgment now, in my view, rather than waiting for actual concrete evidence of second-round effects.
And I'll bring in Dave Ramsden. But when you answer, Dave, one of the other things we've discussed here is fuel. You mentioned the high cost compared with crude of air fuel, but it doesn't seem to have impacted on holidays for British consumers this summer, partly because some hedged over. And perhaps you could give us a flavor of how much impact you think there could be on flights.
Back in July, I voted to leave rates unchanged, and my assessment was really I saw risks pulling in two different directions. I start from a position of thinking that the current stance of policy—which let's not forget, the market curve is significantly above where it was expected to be before the conflict. Bank rate was expected—I was certainly expecting to cut bank rate. And so I think of unchanged bank rate as still being consistent with a restrictive policy. But the two sets of risks I was balancing, and this comes directly to the discussion you're just having with Megan: when I look at the kind of domestic position, I think that's relatively benign.
I think Megan's right that we're always going to have to make a judgment on second-round effects, but particularly in the labor market, I take quite a lot of assurance from the fact that—this is something we actually talked about when I was last in front of you in December—our assessment of the labor market over the short term and over wages has turned out to be not only relatively accurate, but actually we've been overforecasting wages. So in Q2, our preferred measure, private sector regular wages, came in at 2.8%. Pre-conflict, we were expecting 3.2%. So you've got a relatively benign picture, which I'm sanguine about. I'm not saying that won't change.
Overlaid on that, and this was something I emphasized in July, you've got this increasingly complex global picture with a prolonged conflict in the Middle East, other things that we've talked about impacting on the products that consumers actually buy like petrol. And then, as I emphasized in my minutes paragraph, you've got other shocks coming along, for example, extreme weather events. We talked about El Niño in the MPR, but we and a lot of Northern Europe has had a drought. We know that's impacted on yields. Then you've got other factors like AI, which are global, which are increasingly having a bearing. So I do see the global inflationary picture as much more of an upside risk relative to that benign domestic picture.
So then it comes back, I think, to the interaction between, if the global picture is going to continue to be a worry, is that going to start to impact on the persistence of domestic pressures? My judgment, and why I differed from Megan in policy in July, was that I'm comfortable with the current position on policy, but I'm very conscious of that risk picture.
Just on your—I mean, on your—
You're right, we haven't seen the kind of demand effects on travel that you might have expected yet. But I think that is probably because—and we got a lot of reports on that—airfares have not gone up yet.
