Andrew Bailey fought back on Monday against critics of the Bank of England’s handling of inflation, insisting that the central bank had not allowed the economy to overheat and was treading a “narrow path” to contain price rises without triggering a recession.
The BoE governor, speaking at a conference in Vienna, said he rejected the argument that the monetary policy committee had allowed demand to get out of hand and stoked inflation.
“The facts simply do not support this,” he said, arguing that UK output was barely above its pre-coronavirus level, and that price pressures stemmed rather from an unprecedented succession of global shocks, combined with an unexpected shrinking in the size of the UK’s workforce.
“What we do have is a very tight labour market. But that does not look like a story about rapid demand growth . . . It looks much more like an impact from the supply of labour,” he said.
Bailey has come under intense criticism over the BoE’s failure to contain the recent surge in UK inflation, which hit 9 per cent in April and looks likely to stay high for longer than in other European countries.
He admitted that the BoE could not lay claim to any “tremendous foresight” in the current situation, but underlined that it had already raised interest rates four times since December and was “prepared to do so again based on the assessment at each of our meetings”.
However, he warned that the BoE was still trying to judge how far inflation would fall on its own, as higher energy prices ate into household incomes and forced consumers to retrench.
“We are facing a very big negative impact on real incomes caused by the rise in prices of things we import, notably energy. We expect that to weigh heavily on demand,” he said, adding that this made him wary of making any public commitments on the likely path of interest rates.
“We have to be careful and we have to take these decisions meeting by meeting, which is why I don’t want to overuse forward guidance,” he said, noting that the BoE faced the twin risks of “high inflation on one side and the risk of a recession on the other”.
He said the biggest uncertainties over the outlook for UK inflation were whether consumers would spend the savings they had accumulated during the pandemic, in order to maintain living standards in the face of higher prices; and whether workers who had dropped out of the labour market would return as their savings ran out — or prove able to fund early retirement.
Although the BoE had on average kept inflation on target over the period since the global financial crisis, Bailey said it now faced “a moment to be reflective and self-critical” as it sought to bring inflation under control without “undue damage to output”.