The governor of the Bank of England warned on Sunday that it “will have to act” to curb inflationary pressure, making no attempt to contradict financial market moves that have priced in the first interest rate increase before the end of the year.
Speaking from home to the G30 group of central bankers, Andrew Bailey governor said inflation in the UK had already risen and would rise further in ways that would warrant action to tame medium-term inflation.
Ramping up the rhetoric ahead of the Budget and the BoE’s next forecast on November 4, he signalled that his concerns on inflation during the current energy crisis had increased.
The governor stuck by his long-held view that the rise in inflation, which jumped to 3.2 per cent in August, would ultimately be “temporary” but noted that large price increases would last well into next year.
“The energy story means [the period of high inflation] will last longer,” he said.
While he said the BoE could do nothing about the initial price rises in energy and in goods hit by supply chain turmoil, the rate-setting Monetary Policy Committee was increasingly concerned about higher prices raising “medium-term inflation and medium-term inflation expectations”.
“That’s why we, at the Bank of England, have signalled, and this is another such signal, that we will have to act,” Bailey said. “But of course that action comes in our monetary policy meetings,” he added.
Less than a month ago, financial market participants expected the first interest rate rise from the bank not to come before the summer of 2022, but the rise in prices and increase in rhetorical output from the central bank has brought that date forward.
A majority of people trading on the overnight index swap market, which foreshadows the BoE’s interest rate, expect the first rise from 0.1 per cent to 0.25 per cent at this year’s December meeting.
Few think the BoE will move as early as the November meeting because most of the committee have said they want to wait until there was good evidence on the effect of ending the furlough scheme before taking action.
New UK inflation figures will be published this Wednesday, with economists expecting the September rate will remain at 3.2 per cent before it rises sharply to above 4 per cent at the end of the year.
Bailey said one of the key reasons for the rise in inflation was that consumers were still demanding goods rather than shifting to spending money on services, and this rise in demand combined with supply chain problems led to higher prices.
He added that these changes in consumption patterns were combining with a decline in the number of people willing and able to work because younger people were staying in education at the same time as there had been a rise in the retirement rate.
“I do have concerns about labour supply growth,” he said.
But he added that he did not believe there was a “general pattern of labour market pressure” visible yet in the UK economy.
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