The Governor of the Bank of England, Andrew Bailey, has stated that the central bank is prepared to act more forcefully to tackle soaring inflation. While there has already been a series of interest rate hikes since December 2021, Bailey claims policymakers ‘have the option’ of taking more forceful action if necessary.
Bailey has previously made similar statements regarding rate rises that never came to fruition, so some may be wondering whether this latest statement will amount to anything. However, according to Bailey, the prospect of an increase of 50 basis points next month cannot be ruled out. He made the statement at the European Central Bank’s (ECB) conference in Sintra, Portugal, earlier this week.
Gradual increases so far
While the base rate has increased over the past six months due to inflationary pressures, this has been done gradually with 25 basis point increases.
Speaking at the conference, Bailey said: “There will be circumstances in which we will have to do more. We’re not there yet in terms of the next meeting. But that’s on the table. But you shouldn’t assume it’s the only thing on the table.”
There are now expectations from Threadneedle Street that inflation will break the 11% barrier. Markets believe there is an 80% chance the base rate will be increased by 50 basis points in August.
Bailey added that the UK economy was now clearly starting to slow down, adding that it was the responsibility of central banks to take steps to bring inflation down.
He said, “But, in fulfilling that task, what we are observing is structural changes. I think COVID is leaving a legacy on labour markets, and certainly, the European security situation has changed and that is affecting supply chains, resilience of the whole supply system.”
Federal Reserve chair Jerome Powell also spoke about the state of inflation worldwide. He said time was of the essence and that persistent inflation had to be avoided. According to Powell, an economic slowdown is likely to be one of the effects of dealing with soaring inflation, and this has triggered fears of a global recession.
Monetary policy forecasts on target
Elsewhere, the Monetary Policy Committee’s newest member, Swati Dhingra, addressed the Treasury Select Committee earlier this week. An Associate Professor of Economics at the London School of Economics, she is set to join the MPC in August.
Responding to questions about her views on inflation, she said: “Just taking how things are at the moment, I think the monetary policy report forecasts are fairly on target, in the sense that there will be some pressure in October, but we should expect that this will eventually drop out of the index.”