Bank of England governor Andrew Bailey hit back at critics today, arguing that the Bank could not have pre-empted the current wave of punishing inflation without hiking interest rates “well into double-digits” in the middle of the Covid-19 pandemic.
The Bank has faced criticism from those who argue its looser monetary policy during the pandemic, when interest rates were close to zero, has caused the cost-of-living crisis.
However, Bailey said these critics ignored the fact that Russia’s invasion of Ukraine played an especially large role in price rises, and without the war, the Bank may have drastically undershot on inflation. This echoed similar comments from deputy governor for monetary policy Ben Broadbent.
He went on to say that even if the Bank could have predicted the war in Ukraine, the actions the Bank would have to have taken to prevent the current inflation crisis would have involved interest rates well above 10%, likely creating a surge in unemployment and a drop in wages.
“I’d like to push back strongly against one argument you sometimes hear, which is that inflation is high because monetary policy was too loose in the past,” he said.
“The headline is that, even if we had had the benefit of full hindsight in the run-up to the war in Ukraine, and ample advanced warning – which for the record we did not, no one did – then in order to keep inflation at around 2%, we would have had to raise Bank Rate well into double digits, sending unemployment much higher than it is today, and we would have had to do so in the middle of the worst pandemic in more than a century.”
Bailey was also optimistic about the inflation picture improving soon, noting that tere are “good reasons” to think that inflation will fall sharply over the next few months.“We do have good reasons to expect inflation to fall sharply over the coming months, beginning with the April number to be released on 24 May,” he said.”
“Energy prices have fallen from their peaks, and that will now start to come through as lower inflation.”He said that energy will go from contributing three percentage points to headline inflation to contributing just one percentage point.
Bailey was speaking at the British Chamber of Commerce’s conference, where Jeremy Hunt also spoke earlier today.
Hunt said he understood that many were worried about their tax burden, but that inflation was effectively a tax as well.
“We have to get our taxes down, particularly our busness taxes,” he said. “But the worst tax of all is inflation. Inflation is a tax that you get nothing back from.
“That has to be the overwhelming priority for us.”