By William Schomberg and Andy Bruce
LONDON (Reuters) -Bank of England Governor Andrew Bailey said on Tuesday the British central bank had “very big lessons to learn”, with inflation still in double digits and food prices rising at the fastest rate since the 1970s.
Bailey and other top BoE officials faced two hours of often harsh criticism from lawmakers during a question-and-answer session in parliament about the central bank’s failure to forecast the scale of inflation’s jump.
“I think there are very big lessons about how we operate monetary policy in the face of very big shocks,” Bailey said.
Britain’s inflation rate in March was the highest in Western Europe at 10.1%, putting the BoE under intense political scrutiny. Critics have accused it of being slow to react and being out of touch with struggling households.
Harriett Baldwin, the chair of parliament’s Treasury Committee, told Bailey that the central bank had failed to respond quickly enough to warnings from food producers that costs were rising sharply.
“Something has really gone wrong with your modelling and your network of agents which is meant to give you this edge in terms of information,” Baldwin said.
Bailey said the BoE’s market contacts were told in February that food inflation had likely peaked, but that turned out not to be correct, with weather events in other parts of the world affecting crops such as sugar.
He said food producers may also have locked in higher costs than the BoE had anticipated, something he conceded should have been picked up by the central bank.
Earlier on Tuesday, the Office for National Statistics said British food inflation – at 19.1% in March – was the second-highest among Group of Seven countries, behind only Germany.
John Baron, another lawmaker on the committee, accused the central bank of a “woeful neglect of duty” which had caused “real pain out there with people and with businesses.”
Bailey responded by saying the shocks faced by the economy had been unprecedented. “We have to make policy in real time. We don’t make policy with the benefit of hindsight. We have had to respond to shocks as they occurred,” he said.
BoE Chief Economist Huw Pill said the central bank’s forecasting models were based on the experiences of 30 years of inflation-targeting which had been successful until recently.
“That’s a period where we haven’t been exposed to shocks of the magnitude that we have seen,” he said.
The BoE has raised interest rates repeatedly since December 2021, from 0.1% to 4.5% today. Financial markets fully price in further increases to 5% by the end of 2023.
“I can’t tell you whether we’re near to the peak, I can’t tell you whether we are at the peak. I think we are nearer to the peak than we were,” Bailey said.
Data on Wednesday is expected to show Britain’s consumer price index fell back to 8.2% in April but that would still be more than four times the BoE’s 2% target.
Prime Minister Rishi Sunak has promised to halve inflation this year as he tries to tackle the big lead of the opposition Labour Party before an election expected in 2024.
Last month, union bosses and tabloid newspapers criticised Pill for saying that the country needed to accept it was poorer because of shocks like the energy price surge sparked by Russia’s invasion of Ukraine.
Earlier this month, Bailey said Pill’s wording was wrong.
“We do have a challenge – I will be honest with you – in how we communicate,” Bailey said of the BoE’s attempts to convey the outlook for interest rates.
In his annual report to parliament, Bailey repeated the BoE’s existing language that further interest rate increases would be required if evidence of more persistent inflation pressures appeared.
(Reporting by William Schomberg, Suban Abdulla and Andy Bruce; editing by Christina Fincher and Mark Heinrich)
