Bank of England (BoE) Governor Andrew Bailey denied that officials allowed inflation to get out of control by acting too slowly, saying interest-rate increases a year ago would have damaged the recovery from the pandemic.
The remarks in an interview on BBC Radio yesterday respond to growing attacks on the UK central bank from the ruling Conservative Party. Inflation is at a 40-year high and forecast to climb further in coming months.
While the BoE was first among major central banks to lift rates, it’s fallen behind the US Federal Reserve in the pace of increases. Bailey noted that a year ago, the UK was just emerging from lockdown and policy makers were worried about a spike in unemployment as the government wound down furlough payments.
“I would challenge anybody to have been sitting here a year, two years ago say there’s going to be a war in Ukraine, and it’s going to have this effect on inflation,” Bailey said on the Today programme. Asked whether acting early would have risked a recession, he said: “Yes.”
BoE Chief Economist Huw Pill repeated the defence on Bloomberg Television later yesterday, saying “I don’t believe we’re behind the curve” on raising rates to curb inflation.
Liz Truss, who is leading in the contest to replace Boris Johnson as UK prime minister, has said she wants to revisit the BoE’s mandate and explore how to ensure policy makers meet their goal to keep inflation down.
Her allies have been more aggressive in faulting the BoE, which yesterday predicted the economy will slide into a recession until 2024 and that inflation will peak above 13% in October, when domestic energy bills are set to surge again. “Interest rates should have been raised a long time ago and the Bank of England has been too slow in this regard,” Suella Braverman, the attorney-general and a supporter of Truss, said on Sky News.
Business Secretary Kwasi Kwarteng joined the attack, giving a series of interviews saying that the BoE should have acted earlier.
“The job of the Bank was to deal with inflation,” Kwarteng said on Sky News. “They’ve got a 2% inflation target, that’s actually their mandate. And now inflation is getting double digits. So clearly, something’s gone wrong.”
Bailey said politicians are welcome to debate the remit of the BoE but that they should preserve the institution’s authority to set monetary policy. He also pledged to serve out his full eight-year term as Governor, no matter who takes over in Downing Street.
I don’t think “there is a large desire in this country to question independence,” Bailey said. “But I’m very happy to discuss with the new government the details on the nature of the regime that’s in place, how it works and how the Bank of England operates within it.”
He said that interest rates usually take two years or so to have an impact on inflation, meaning that the BoE would have had to move up borrowing costs aggressively during the pandemic to stave off the price increase being felt today.
“Given the situation we were facing in the context of Covid in the context of the labour market, the idea that at that point, we would have tightened monetary policy, I don’t remember there were many people saying that at that time,” Bailey said.
Pill, in a briefing for the BoE’s contacts yesterday, said it would have been impossible for officials to prevent much of the inflation coming from energy markets. Natural gas prices have doubled since April and are seven times higher than a year ago, and to offset those increases, he said officials would have had to lift interest rates at the start of last year or earlier.
“If monetary policy was to offset the lag the inflationary impact of that change, given the lags in monetary policy transmission, it would have had to take place 18 months ago, before we saw evidence that gas prices were moving in this way and before it was a mainstream view that we’d see the sort of geopolitical moves we’ve seen,” Pill said.
“There are clearly lessons the bank can and should learn from the past,” Pill said. “The bulk of the inflation we’re seeing today could not have been offset.”
Andrew Bailey, governor of the Bank of England.