Bailey: Bank of England walking ‘tight line’ on taming inflation and hitting growth
The Bank of England is walking on “a very tight line” between taming inflation and heaping greater woe on the UK economy.
That’s according to Andrew Bailey, the governor of the Bank of England, who, speaking to the Peterson Institute today, added that the historic high cost of living is going to result in “very large real income effects”.
The Bank is weary of intensifying an expected hit to growth caused by a reduction in spending by hiking interest rates rapidly to cool price rises, Bailey said.
Both the International Monetary Fund and the Office for Budget Responsibility have cut their forecasts for UK growth this year off the back of an expected spending slowdown caused by historic high inflation eroding living standards at the quickest pace since 1956.
Bailey agreed with those assessments.
Global energy prices have soared since the Kremlin sent troops into Ukraine, while supply chains continue to be gummed up by Covid-19 restrictions in Asia, particularly China, dealing an unprecedented shock to the UK economy, Bailey said.
UK inflation has climbed to its highest level in 30 years, hitting seven per cent.
It is expected to scale even higher in the coming months, with some betting it could reach double digits.
The governor said the rising cost of living is also being driven by the UK having “a very tight labour market” that is putting upward pressure on wages and strengthening incentives for firms to hike prices to protect margins.
Bailey has been critcised for spearheading a muddled communications strategy – seen as a key tool in a central bank’s arsenal for delivering effective monetary policy – since he took the helm.
Rate setters should be “humble” in the degree of forward guidance they can give on the trajectory of rates due to severe volatility in the global economy, Bailey argued.
Last November, the Bank rolled back on expectations, stoked by the governor, of a first rate rise in three years.
It has since raised rates at each of the last three meetings and is expected to do so again at its next meeting.