Bank of England governor Andrew Bailey on Monday said he was unable to stop UK inflation hitting 10 per cent this year, as he admitted sounding “apocalyptic” on food price rises.
After senior Tory MPs last week attacked the BoE over its handling of soaring price increases, Bailey accepted inflation was far too high but blamed global shocks including Russia’s invasion of Ukraine.
Speaking about future risks, Bailey raised concerns about food prices. “The [risk] I’m going to sound I guess rather apocalyptic about is food,” he told the House of Commons Treasury select committee, saying that Ukraine’s inability to export its crops were “a major worry for this country”. Ukraine is a big producer of grains including wheat, and sunflower oil.
Bailey insisted the BoE would raise interest rates far enough to ensure UK inflation falls from an expected peak of more than 10 per cent in the autumn back to the central bank’s 2 per cent target.
Consumer price inflation hit a 30-year high of 7 per cent in March, and the BoE Monetary Policy Committee this month raised its main interest rate a quarter point to 1 per cent.
“The most important thing we can do is to get inflation back to target and to get back to target without unnecessary disruption to the economy,” Bailey told MPs.
He implied the BoE would not shy away from generating a recession to do that if it was necessary. “We have to get [inflation] back to target. And that is clear,” he said.
Sir Dave Ramsden, BoE deputy governor, was explicit about the additional financial pain some UK families would face as the BoE sought to curb spending and limit price rises by increasing interest rates.
“If you’re remortgaging now, it’s going to cost you a lot more than [it did] a year ago and that means you will have less to spend on other things,” he said.
BoE officials came under sustained probing by MPs on the failure by the central bank to foresee the big rise in inflation and take earlier action to tighten monetary policy.
“It’s a very, very difficult place to be,” Bailey said. “To forecast 10 per cent inflation and to say there isn’t a lot we can do about it is an extremely difficult place to be . . . This is a bad situation to be in.”
But Bailey deflected criticism by MPs, blaming a series of shocks that he said could not be forecast.
“I do see comments based on hindsight, but we have to take [monetary policy] decisions based on the facts and evidence at the time,” he said.
The governor pinpointed rising prices for energy and goods as causes of inflation, and highlighted shocks such as Russian president Vladimir Putin’s invasion of Ukraine and the impact of China’s zero-Covid policy.
“A sequence of shocks like this, which have come really one after another with no gaps between them, is almost unprecedented,” he said.
Bailey acknowledged the MPC had changed its view about the UK labour market and now believes it is “very tight”, something it did not understand until well after the government’s Covid-19 furlough scheme ended.
He highlighted a large rise in long-term sickness, which has reduced the UK workforce by about 400,000 people.
Bailey said no member of the government had raised questions about the BoE’s independence with him in recent weeks.
“This is the biggest test of the monetary policy framework for 25 years,” he added. “This is when both the independence of the bank and the [2 per cent inflation] target matter more than ever.”
Most Conservative MPs on the Treasury committee refrained from attacks on the governor or the BoE.
Boris Johnson also declined to criticise the BoE over its handling of inflation, with a spokesperson for the prime minister saying: “It’s not for the government to comment on the conduct or effectiveness of its monetary policy.”