High inflation will persist longer in UK, Bailey warns
CHRIS GILES — LONDON
MARTIN ARNOLD — SINTRA
COLBY SMITH — WASHINGTON
Britain’s economy is suffering more from the energy crisis than other countries, Andrew Bailey warned yesterday, as he and other central bank chiefs said the era of low inflation and interest rates had come to an end.
As he acknowledged that UK inflation was likely to stay higher for longer than elsewhere, the Bank of England governor indicated that there might need to be a half a percentage point increase in interest rates at the next monetary policy meeting in August.
“The key thing for us is to bring inflation back down to target and that is what we will do,” Bailey said, underlining that the BoE would tackle rising prices even if that hurt households. However, he warned there would “unfortunately” be a further step up in inflation this year because of energy price rises in October.
Bailey’s comments at a European Central Bank conference in Sintra, Portugal, were echoed by his counterparts from the US and the eurozone, who issued calls for rapid action to slow price rises.
Jay Powell, US Federal Reserve chair, said: “The process [of taming inflation] is highly likely to involve some pain but the worst pain would be from failing to address this high inflation and allowing it to become persistent.”
“I don’t think that we’re going to go back to that environment of low inflation,” said Christine Lagarde, ECB president. “There are forces that have been unleashed as a result of the pandemic [and] this massive geopolitical shock that are going to change the picture and the landscape within which we operate.”
The bank chiefs warned that the splintering of the global economy into competing blocs threatened to fracture supply chains, hit productivity, raise costs and reduce growth.
“We’re living with different forces now and have to think about monetary policy in a very different way,” Powell said, admitting that forecasting inflation was now much more difficult. “We understand better now how little we understand about inflation.”
“I think the UK economy is probably weakening rather earlier and somewhat more than others,” he added, blaming the difference on the problem of people dropping out of the jobs market compounding the energy price shock that all European economies had faced.
Monetary policy has tightened from a 0.1 per cent interest rate in December last year to the 1.25 per cent rate set in June. Markets expect rates to rise to about 3 per cent in a year’s time.
