Bank of England governor 'very uneasy' about rising inflation

Andrew Bailey, the governor of the Bank of England (BoE), has voiced his concern about the UK’s rising inflation, admitting that he is “very uneasy about the situation”.

Appearing in front of the Treasury Committee on Monday, he said that growth in the British economy is starting to “flatten out”, meaning that Britain was facing more “two-sided risks” than before.

He pointed to weaker growth on one side, and rising inflation on the other, in the midst of ongoing supply disruptions and an energy crisis that is dampening recovery and pushing inflation even higher.

“I am very uneasy about the inflation situation… I want to be very clear on that.” Bailey said. “It is not, of course, where we want it to be, to have inflation above target.”

UK inflation stood at 3.1% in September, above the Bank’s 2% target, and is expected to keep climbing to as much as 5% by next April.

Watch: What is inflation and why is it important?

Bailey faced questions about Threadneedle Street’s latest economic forecasts as well as why the Monetary Policy Committee (MPC) kept UK interest rates at its current historic low of 0.1% earlier this month.

On 4 November, the MPC voted by a majority of 7-2 to maintain the Bank rate as it is despite widespread anticipation it would increase the rate to 0.25%.

The UK's main interest rate has been at an all-time low of 0.1% since the pandemic began, having been set at 0.75% pre-pandemic. A rise to 0.25% would have been the second lowest rate the bank has ever set.

Analysts have said that they expect the rate to be hiked to pre-pandemic levels in the next 18 months as the economy resumes a more steady course.

However the move prompted some to brand Bailey as the "unreliable boyfriend" — a moniker shared by his predecessor Mark Carney, who faced criticism over his "forward guidance" policies.

Read more: Bank of England holds interest rates at all-time low of 0.1%

On Monday, Bailey said the decision of the MPC was “very finely balanced”, but that there was not enough clear evidence on what had happened to the labour market in the wake of the end of the government’s furlough scheme.

He said it was a very close call for him personally to vote to leave rates on hold.

“For me the question was, do we wait six weeks, until the next meeting. Bearing in mind we'll start to see the picture by then, he said.

“I felt that on balance for me there was something to be said for waiting to see this evidence on the labour market from the official data which we will start to get tomorrow, interestingly."

The BoE governor was joined by Huw Pill, the Bank’s chief economist, as well as external MPC members Michael Saunders and Dr Catherine Mann.

Watch: Will interest rates stay low forever?

Pill defended the Bank’s 7-2 split, saying it was a "healthy reflection of the strength of the system". He also went on to highlight a survey by the Recruitment and Employment Confederation (REC) that showed wages for new hires in the UK are continuing to climb, adding that unemployment is now likely to come in slightly lower than the Bank's forecasts.

Meanwhile Mann said one of the crucial points in the labour markets was whether firms can pass on their increased wage costs to customers.

But Bailey played down comparisons of the labour market with the 1970s, saying it is “substantially different today than it was” then.

“Companies are having to pay up to recruit people. That doesn’t necessarily translate at the moment into paying their existing staff more,” he said.

Saunders, one of the MPC’s more hawkish members, who voted for an increase in interest rates at the recent meeting, said a recent survey showed that the "vast bulk" of those who were on furlough are now back in work.

Read more: UK house prices jump in October amid interest rate rise speculation

He also said on Monday that there is “no risk” of the UK entering an inflationary spiral of wages and prices. He said talk of such a phenomenon is “completely wrong”.

However, he warned that there could be a “persistent overshoot” of the 2% target if rates don’t increase.

UK house prices were also on the agenda, with MPC members stating that the recent surge was due to both low interest rates and factors such as the stamp duty holiday, and the ‘race for space’.

“If you look at real house prices... we're still not seeing a level of house price relative to incomes that is really as high as what we saw in the mid-1970s and 1980s,” Pill said.

Watch: Bank of England chief: I'm uneasy about inflation but we are a long way from the 1970s