Bigger interest rate hike ‘among the choices’ at next BoE meeting, Governor says

Mr Bailey said that the Russian invasion of Ukraine is squeezing inflation higher. (Stefan Rousseau/PA) (PA Wire)
Mr Bailey said that the Russian invasion of Ukraine is squeezing inflation higher. (Stefan Rousseau/PA) (PA Wire)

A bigger interest rate rise will be on the table at the next meeting of the Bank of England’s decision makers, the Bank’s boss will say as he pledges to get inflation under control.

Governor Andrew Bailey is expected to say that a 50 basis point rise – from 1.25% to 1.75% – would be one of the options for the Monetary Policy Committee.

At the annual Mansion House speech in the City of London, Mr Bailey will urge against reading too much into the statement.

“At the MPC’s last meeting we adopted language which made clear that if we see signs of greater persistence of inflation, and price and wage setting would be such signs, we will have to act forcefully,” he will say.

“In simple terms this means that a 50 basis point increase will be among the choices on the table when we next meet.

“50 basis points is not locked in, and anyone who predicts that is doing so based on their own view.

The MPC will next meet on August 5 and will be keeping a close eye on the latest inflation figures.

The Office for National Statistics will on Wednesday reveal what happened to inflation in June. Consumer Prices Index inflation is widely expected to have risen again from May’s 9.1% – already a 40-year high.

But Bank forecasts put CPI at over 11% in October this year.

The Bank of England is tasked with trying to keep inflation in the UK under control – 2% annual inflation is the target.

“Let me be quite clear, there are no ifs or buts in our commitment to the 2% inflation target. That’s our job, and that’s what we will do,” the Governor will say.

But it is a daunting task at this time.

“From the perspective of monetary policy, these times are the largest challenge to the monetary policy regime of inflation targeting that we have seen in the quarter century since the MPC was created in 1997,” Mr Bailey will say.

He said that a number of factors are pushing up inflation – firstly the reopening of the economy after Covid, secondly the loss of workers in the UK, and thirdly Russia’s war against Ukraine.

“The big external shocks – from Russia and supply chains – account both for a large part of the inflation overshoot above target and for the squeeze on real incomes,” he will say.

“My sense of the latest data is that the supply chain/goods shock has started to ease, but the Russian impact – particularly on natural gas prices in Europe is going the other way as we look ahead to the winter.

“The effect of these shocks has been to increase the cost of things we import relative to things we produce domestically.”