Bank of England Governor Andrew Bailey signaled further interest rate increases may be needed to contain inflation, comparing the current situation with the 1970s.
(Bloomberg) — Bank of England Governor Andrew Bailey signaled further interest rate increases may be needed to contain inflation, comparing the current situation with the 1970s.
“If we do too little with interest rates now, we will only have to do more later on,” Bailey said, according to a text released by the BOE on Wednesday. “The experience of the 1970s taught us that important lesson.”
The governor said the BOE’s key rate at 4%, the highest since 2008, is “having an impact” on the economy and that some “further increase in Bank Rate may turn out to be appropriate.” But he urged “caution against suggesting either that we are done with increasing Bank Rate, or that we will inevitably need to do more.”
Investors who in recent days moved to price in three-quarters of a point of further hikes by September trimmed those bets and sent the pound lower. That left the outlook for rates stronger than it was at the start of February, when the BOE appeared to endorse market rates showing a peak at 4.5%.
Bailey’s speech may be his last major remarks ahead of budget that Chancellor of the Exchequer Jeremy Hunt is due to present on March 15 and the next BOE rate decision on March 23. He’s not scheduled to speak next week.
While the UK economy is evolving much the way policy makers anticipated in February, the labor market remains tight and is adding to pressure on prices, Bailey said in a speech at Brunswick Group’s Cost of Living Conference in London.
“We have to keep a very close eye on domestic inflationary pressures reflecting a tight labor market,” he said. “Inflation has been slightly weaker, and activity and wages slightly stronger, though I would emphasize slightly in both cases.”
Bailey’s remarks hint at a shift in tone. As inflation began to creep up in 2021, he insisted it would be “transitory” and steered away from comparing the situation with the 1970s, saying it was very different from that era.
In November 2021, Bailey said he tends to “play down the comparison with the 1970s.”
Much of his speech at the Brunswick Group conference focused on households’ financial difficulties, with inflation at over 10% — five times the BOE’s target. Food prices are almost 17% higher than January last year and rocketing energy prices have “had a big impact.”
In a report published alongside the speech that took evidence from outreach meetings across the country, the BOE acknowledged worries that “households with mortgages would not be able to cope with rising interest rates” and criticism over its efforts to contain inflation.
“Some people questioned the bank’s earlier decisions, including on quantitative easing, which some felt might have contributed to rising inflation,” according to the report, which was released alongside the speech.
“Others argued that the bank should have acted sooner in the last couple of years when evidence was increasing that inflation was rising,” the report said. “Generally, however, people understood why the Bank took the actions it had.”
It emphasized that though the cost-of-living squeeze had affected everyone, “the impact has not been felt equally.”
Citizens attending the sessions “told us they were struggling to afford essentials such as food, energy, fuel, and housing,” the BOE said, with those on low or fixed incomes such as Universal Credit or state pensions “particularly badly affected.”
In Bristol, interviewees were particularly worried about the effects of Brexit – particularly the loss of migrant workers in the agricultural sector, and the effect this was having on wages.
In Falkirk, Scotland, people felt the BOE had been “behind the curve”, while others questioned the purpose of rising rates when the pressure on costs was being driven by external factors such as the energy market.
Bailey said the accounts he had heard from Britons across the country were “sobering.”
And while Bailey noted that the rising cost of borrowing was adding to the pressure on household finances, he insisted: “We must ensure that the situation does not get worse through homemade inflation taking hold.”
–With assistance from Tom Rees and Andrew Atkinson.
(Updates with details from the speech and market reaction.)
More stories like this are available on bloomberg.com
©2023 Bloomberg L.P.