A larger rate hike is “on the table” at the Bank of England’s next meeting on 4 August, its chief said today.
Speaking on a panel at the European Central Bank’s (ECB) forum on central banking in Sintra, Portugal, Bank governor Andrew Bailey did not rule out a steeper rate rise, saying “there will be circumstances in which we will have to do more”.
However, Bailey tried to temper market expectations for a larger 50 basis point rate rise, saying they “shouldn’t assume it’s the only thing on the table”.
The Bank said its forward guidance released after its last policy meeting that it will “act forcefully” if inflation keeps rising.
Speculation on Threadneedle Street lifting borrowing costs by more than usual at its meeting earlier this month had ramped up as investors bet the central bank would have to speed up its tightening cycle to tame rampant inflation.
Those bets were scuppered when the monetary policy committee voted 6-3 in favour of hoisting rates 25 basis points. The three dissenters backed a steeper rise.
Central banks around the world are in the process of switching off ultra-stimulative policy that has characterised the global economy since the financial crisis and was scaled up during the pandemic to curb inflation.
Prices are up 9.1 per cent in the UK, the quickest acceleration in four decades, while in the US, they have climbed 8.6 per cent, also a forty year high.
Inflation in the eurozone is running at 8.1 per cent, the highest rate since the creation of the euro in 1999.
However, the likes of the US Federal Reserve and the Bank are treading a fine line between taming inflation and plunging their respective economies into a recession.
“Is there a risk we would go too far? Certainly there’s a risk,” Powell, who joined Bailey on the panel, said.
The Fed lifted rates 75 basis points earlier this month, something it has not done since 1994.
ECB president Christine Lagarde, also on the panel, said keeping inflation at central banks’ two per cent will be more challenging in the coming years.
“I don’t think that we’re going to go back to that environment of low inflation,” she said.
Lagarde yesterday reaffirmed the ECB’s commitment to lifting rates for the first time in over a decade next month and hinted they could rise 50 basis points in September.