Bank of England governor Andrew Bailey has raised the possibility of increasing interest rates by half a percentage point in early August as he toughened further the central bank’s language on battling rising prices.
Bailey said the central bank’s Monetary Policy Committee had an “absolute priority” to bring inflation back down to its 2 per cent target and currently faced the “largest challenge” to inflation control since the bank gained independence on setting interest rates in 1997.
With June inflation figures likely to rise to another 40-year high of at least 9.3 per cent on Wednesday, Bailey set out the policy options under consideration by the MPC.
A half-percentage-point interest rate rise would be largest since 1995. The governor also raised the BoE’s thinking for the first time on selling some of the assets it bought under the rounds of quantitative easing since 2009.
“In simple terms this means that a 50 basis point increase will be among the choices on the table when we next meet,” Bailey told an audience of financial and business leaders at the annual Mansion House dinner in the City of London.
Financial markets increasingly expect the European Central Bank to increase its main interest rates also by half a percentage point on Thursday.
Bailey said there was no guarantee the increase would be that large, adding that the committee would have to take into account the easing of global supply-chain bottlenecks as well as higher gas, food and fuel prices following Russia’s invasion of Ukraine.
“We have been clear that we see the balance of risks to inflation as on the upside,” Bailey said.
The governor acknowledged that interest rate rises would come at a time when people in the UK were becoming poorer and struggling over accessing basic necessities, saying the BoE had already taken this into account when it set monetary policy.
Regarding the sale of assets, Bailey set out quite an aggressive timetable for bringing down the level of government bonds it had bought, which peaked at £895bn.
“Based on analysis conducted in conjunction with colleagues at the debt management office, we are currently looking at a total reduction in the stock of gilts held . . . in the region of £50bn‐£100bn in the first year,” Bailey said.