Speaking at the London School of Economics, Bank of England’s (BoE) governor Andrew Bailey (pictured) said that UK Consumer Price Inflation (CPI) at 10.4 per cent was “much too high” adding that “we need to, and will, bring it back down to the two per cent target”.
“I am afraid that monetary policy cannot make the shocks to our national real income go away. But what monetary policy can – and must – do is to make sure that the inflation that has come to us from abroad does not become lasting inflation generated at home,” he added.
Bailey continued that the BoE’s “most important tool” to bring down inflation was the base rate but added that “monetary policy operates with a lag” so changes to the base rate take time to work through the financial system to consumers.
Therefore, the Monetary Policy Committee (MPC) must “look ahead and focus on the outlook for inflation” as well as the current inflation level when deciding whether to change the base rate.
Energy and food price increases are ‘unwinding’
Bailey said that the economy had been subject to “very large and overlapping shocks”, the largest of which was Russia’s invasion of Ukraine.
He said that this had a huge impact on energy and food prices but those “effects are now unwinding”, which is the primary reason why it expected to see a “sharp fall in inflation” during this year, which would start in the next few months.
Bailey continued that whilst there has been a hit to trade and an impact on national real income, the economy had been “more resilient of late”.
“The remit is clear. The adjustment and response to the shocks we have experienced must return CPI inflation to the two per cent target sustainably.
“We must avoid these very large shocks leading to persistent inflation, and that is why we have raised the official interest rate eleven times to 4.25 per cent,” he noted.
Bailey continued that the “evidence” had pointed to a more resilient economy and employment, with nominal wage growth “weaker than expected”.
He noted that over the past few months there had been “downside” and “upside” news on expectations of inflation, which he said “reminds us that the path of inflation will not be entirely smooth and cost and price pressures remain elevated”.
“We believe the UK banking system is resilient, with robust capital and liquidity positions, and well placed to support the economy. We have a strong macroprudential policy regime in this country. “With the Financial Policy Committee on the case of securing financial stability, the MPC can focus on its own important job of returning inflation to target,” he added.
Bailey said that the BoE had to be “very alert to any signs of persistent inflationary pressures” and if they become “evident, further monetary tightening would be required”.
“With this in mind, the MPC’s response will be firmly anchored in the emerging evidence,” he concluded.
