Bank of England’s Bailey says UK not on verge of recession

Bank of England Governor Andrew Bailey wants everyone to take a breath. The UK economy, he says, is not sliding toward recession, even as growth forecasts remain stubbornly underwhelming and a cocktail of global pressures continues to weigh on the outlook.

What Bailey actually said

The BoE’s own projections paint a picture of an economy trudging forward at a modest pace. GDP growth is forecast to come in around 1.1% in 2026, ticking up slightly to 1.2% in 2027. Inflation, meanwhile, is expected to peak at around 3.3%, which remains above the BoE’s 2% target. Bailey has pointed to subdued second-round inflation effects as a reason for cautious optimism, suggesting that price increases aren’t feeding into a self-reinforcing wage-price spiral.

On the interest rate front, the BoE has held the Bank Rate steady at 3.75%. The most recent decision came via a 6-3 vote, meaning the Monetary Policy Committee is largely unified but not unanimous. That rate is expected to stay put through at least mid-2027, barring any major surprises.

The headwinds Bailey isn’t ignoring

The labor market is weakening. Bailey has flagged weak productivity and an aging population as twin structural pressures that are pushing up government debt and borrowing costs across advanced economies. Energy price volatility remains another wildcard, with the UK’s exposure to global energy markets meaning supply disruptions or geopolitical flare-ups can quickly transmit into higher costs. Trade-related growth shocks, particularly from tariffs, have also factored into Bailey’s thinking.

The AI risk nobody expected from a central banker

Bailey has warned about the risks posed by a potential correction in AI valuations, estimating it could shave up to 2.2% off GDP in a severe downside scenario.

What this means for markets and policy

The hold at 3.75% reflects a balancing act. Cutting rates too aggressively could reignite inflation when it’s still above target. Raising them could tip an already fragile growth picture into something worse. The BoE appears content to sit tight and let the data evolve.

The productivity problem Bailey highlighted deserves particular attention because it’s the kind of issue that monetary policy simply cannot solve. The UK has struggled with weak productivity growth for over a decade. Until that changes, the economy’s speed limit remains frustratingly low.