Bank of England Governor Andrew Bailey has hit back at growing claims he was too slow to respond to the threat of inflation as the Tory leadership contenders clashed over the best way to avert the looming economic crisis.
The central bank on Thursday issued a gloomy forecast for Britain’s economy, warning the country will slide into a 15 month recession later this year, as inflation soars to an eye watering 13 per cent and unemployment rises.
The shocking assessment of the state of the economy - which was accompanied by the biggest interest rate rise in over 27 years - has reset the backdrop for the Conservative leadership contest with Liz Truss and Rishi Sunak likely to come under new pressure to set out how they will offer fresh support to the most deprived families.
But some of Ms Truss’s allies have rounded on the Bank’s chief, arguing he should have pushed through higher interest rates last year to prevent the sharp rise in inflation.
The Foreign Secretary has already said she would launch a review of the Bank’s mandate if she wins the race for No10 and on Thursday, Attorney General Suella Braverman, a backer of Ms Truss, said that “interest rates should have been raised a long time ago and the Bank of England has been too slow in this regard”.
However in an interview with BBC Radio 4’s Today Programme aired on Friday morning, Mr Bailey insisted: “If you go back two years, which given the monetary transmission mechanisms we would have to go back to, given the situation we were facing at that point with Covid in the context of the labour market, the idea at that point we would have tightened monetary policy...I don’t remember there were many people saying that.”
With households facing the biggest squeeze in living standards for over 60 years, millions of workers are facing a sharp real terms pay cut as inflation erodes any wage rises. And yet Mr Bailey urged employers not to award high pay increases amid fears that this will lead to an even steeper wage price spiral which will cause further economic damage.
He told the BBC: “I put this in terms of high pay rises and high price increases because in that world it is the people who are least well off who are worst affected because they don’t have the bargaining power and that is something I would say broadly we all have to be very conscious of.”
On Thursday night, speaking in a televised debate before Conservative Party members on Sky News, Ms Truss said her plan of swift tax cuts was needed.
Under questioning Ms Truss said: “What the Bank of England have said today is of course extremely worrying, but it is not inevitable.
"We can change the outcome and we can make it more likely that the economy grows."
She added: “Now is the time to be bold, because if we don’t act now, we are headed for very, very difficult times."
Ms Truss insisted that "trying to balance the books prematurely is actually counterproductive".
She said: "It is important over the long term to make sure that the private sector is growing faster than the public sector and we are able to generate the revenues for our economy and also be able to pay for our public services."
The Foreign Secretary refused to answer questions on whether she would strip Boris Johnson of the Conservative Party whip if she becomes prime minister in the event he is found to have misled parliament.
“I’m not making any prejudgments about that, but by the way I’m very clear he didn’t mislead Parliament,” she said.
Rishi Sunak insisted that he would not withdraw from the contest despite polling suggesting Ms Truss has a commanding lead.
He said that Liz Truss’ plans would make the dire economic situation worse, warning of "misery for millions" by pouring "fuel on the fire".
The former Chancellor told the Sky News debate: “We in the Conservative party need to get real and fast because the lights on the economy are flashing red and the root cause is inflation.
"I’m worried that Liz Truss’s plans will make the situation worse."
He said that he had a plan to grow the economy but it “starts with not making the situation worse”.
Although polling suggests Ms Truss is the clear frontrunner in the race, Mr Sunak received some comfort by receiving the backing of a majority of the audience at the Sky News debate in a show of hands.