According to the governor of the Bank of England, Britons should expect a stronger inflation wave than other major economies during the current energy crisis.
Speaking at a conference of central bankers in Portugal, Andrew Bailey said inflation in the UK was higher and would last longer than previously expected as rising petrol and gas prices pushed household bills to new heights.
Bailey said he was determined to curb inflation and was willing to use the Bank’s power to aggressively raise interest rates in response, though he added it may not be necessary if price growth continues towards the end of the year. would slow down.
“I think the UK economy is probably weakening earlier and a little more than others,” he said. “There will be circumstances where we will have to do more. We’re not there yet for the next meeting. We’re still a month away, but that’s on the table. But you shouldn’t assume that this is the only thing on the table – that’s the main point,” he added.
His comments came as leaders of the world’s most powerful central banks warned that the global economy is facing another period of persistently high inflation, unleashed by the coronavirus pandemic after decades of stability.
The heads of the US Federal Reserve and European Central Bank joined Bailey in saying it was unlikely that the era of low and stable inflation in advanced economies since the 1990s would return after a succession of economic shocks.
Christine Lagarde, the head of the ECB, said “forces have been unleashed” by the Covid pandemic, the Russian war in Ukraine and the collapse of global supply chains that made it difficult to return to a world of low and stable inflation. †
“I don’t think we’re going to go back to that low inflation environment,” she said.
During a panel discussion at the ECB’s annual policy forum in Sintra, Portugal, she said: “Many of the moves we’ve seen over the past 20 years have been based on globalization – on breaking down supply chains, on reducing costs, on just in time. That has changed. And will probably change continuously to a system that we are not sure about.”
Lagarde was joined on the panel by Bailey, the chairman of the US Fed, Jerome Powell and Agustín Carstens, the head of the Bank for International Settlements.
Powell said the post-pandemic economy has been driven by “very different forces” over the past decade. “What we don’t know is whether we’re going back to something that’s more like, or a bit like, what we had before. We suspect it will be some kind of blend.”
The Fed chairman said he raised interest rates with the express aim of moderating the pace of growth in the world’s largest economy as it tries to deal with the fallout from severe supply bottlenecks and red-hot demand for goods and services. that drive up inflation.
“The purpose of that is to curb growth so that supply has a chance to catch up. We hope growth will remain positive,” he said.
Bailey said Covid had left a “structural legacy” on the UK job market, where companies struggle with a shortage of workers, while inflation would also be impacted by the reshaping of international supply chains in response to geopolitical tensions and to cope. to global warming. †
Together they represent more than a third of the global economy, and with more than $20 trillion (£16.5 trillion) in assets on their balance sheets, central bank chiefs have warned borrowers against aggressive hikes in interest rates to curb rising inflation. .
Powell said it was the job of central banks to prevent a permanent transition to a “higher inflation regime” after a series of shocks. “There’s a clock running here,” he said.
While he warned that there were signs of slowing economic growth in Britain, Bailey did not rule out a 50 basis point rate hike at the Bank’s next meeting in August and said she had the opportunity to intervene forcefully. †
Economist Swati Dhingra, who will join the Bank’s nine-member monetary policy committee (MPC) later this year, gave separate evidence to the Commons Treasury committee, saying the deteriorating growth outlook had convinced her that a “gradual approach” to rate hikes was necessary. required.
During a hearing with MPs on the Treasury Select Committee to approve her nomination, the London School of Economics economist said she had been willing to take a more aggressive approach to rate hikes until she saw the latest consumer confidence figures. , which recorded the biggest drop in optimism.
“In retrospect, I think there’s room for a gradual approach,” she said. Three MPC members voted earlier this month to raise interest rates of 0.5 percentage point from the central bank’s key rate to 1.5%, while the majority supported a more modest 0.25 point hike.