Bank of England Governor Andrew Bailey said UK interest rates will have to go up again if prices keep rising in the economy.
(Bloomberg) — Bank of England Governor Andrew Bailey said UK interest rates will have to go up again if prices keep rising in the economy.
After pushing through another quarter-point increase in the benchmark lending rate to 4.25% on Thursday, Bailey on Friday made a plea to companies and people setting prices to take note of the outlook for a sharp fall in inflation starting this summer.
“If all prices try to beat inflation we will get higher inflation,” Bailey told BBC radio in an interview broadcast Friday. “Please understand, if we get inflation embedded, interest rates will have to go up further, and higher inflation really benefits nobody. It hurts people and it particularly hurts the least well off in society.”
Inflation accelerated unexpectedly last month, breaking a series of declines that the BOE had expected and remaining in double digits for a sixth month. The central bank’s target is to bring it down to 2%, something it sees happening early next year.
Bailey said a sharp drop in energy prices will result in much lower inflation readings in the coming months. But he said the BOE must see those declines turn up in official data and price pressures easing.
He said he remains concerned about tightness in the labor market, with a low supply of workers pushing up wages and fanning inflationary pressures. He added that Chancellor of the Exchequer Jeremy Hunt’s budget measures to bring more people back into the workforce are “important” and that more needs to be done to ensure companies get the staff they need to grow.
“The potential growth rate of the economy is at a low level,” Bailey said. “Investments in productivity — that is only really going to happen against the backdrop of stable inflation. So we have to put the conditions in place for that to happen.”
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