Bank of England's Bailey: 'Historic' energy shock larger than any year in 1970s

Bank of England governor Andrew Bailey
Bank of England governor Andrew Bailey is tasked with balancing surging prices with the risk of an economic slowdown. Photo: Dan Kitwood/WPA Pool/Getty

Bank of England (BoE) governor Andrew Bailey has warned that the shock to real incomes in the UK from rising energy prices will be bigger than in any year in the 1970s due the Ukraine war.

"This really is an historic shock to real incomes," Bailey said, speaking at an event held by the Bruegel think tank in Brussels. "The shock from energy prices this year will be larger than every single year in the 1970s."

Russia's invasion of Ukraine and resulting economic sanctions have sparked a huge surge in oil and gas prices, mounting more pressure on British households as inflation rises to a 30-year high.

Electricity prices have soared 19.2% since April 2021, while gas prices were up 28.3% in the last year.

The BoE is on a cautious path to control inflation while averting an economic slowdown-triggered recession.

In his first comments since the March rate hike, when interest rates were lifted to 0.75%, Bailey said the central bank has started to see evidence of a slowdown in the UK's economic growth, warning that "inflation hurts the least well off the hardest".

Responding to questions on whether he would raise rates by 50bps in May, Bailey said the BoE had "softened its language" on interest rate hikes to reflect the uncertain future, but insisted it was appropriate to tighten policy in the current circumstances.

As the cost of living is set to rise significantly this year, the governor anticipates that lower spending as a result could help tame inflation, suggesting it would return to its 2% target in around two years.

Read more: Cost of living crisis: Top tips to help your personal finance

The BoE has raised interest rates at its last three meetings to combat rising inflation, taking the bank rate back to their pre-pandemic levels of 0.75%.

Its Monetary Policy Committee (MPC) has moved more swiftly than the US Federal Reserve or European Central Bank, with the former increasing rates earlier in March for the first time since 2018.

Economists expect the BoE to maintain a rapid pace, with six further hikes priced in between May’s meeting and February 2023, taking the interest rates to around 2.25%.

The latest Office for National Statistics figures showed UK consumer prices rose to 6.2% in the year to February, ahead of forecasts of 6% and up from 5.5% the month prior.

This was the highest inflation reading since March 1992, with monthly CPI increasing by 0.8% — the biggest monthly CPI surge between January and February since the financial crash. Rising energy bills, fuel costs and food prices were the biggest drivers of the inflation surge.

Bailey said "unfortunately I think it's best to think there is more to come on that front [inflation surge]", with energy being a key component reflecting the Ukraine conflict.

Read more: Pump price savings still fall short of despite Sunak's fuel duty cut

Last week, the Office for Budget Responsibility (OBR) warned that UK living standards are set for the biggest drop on record as higher inflation will cut household disposable incomes by 2.2% on a person-by-person basis in 2022-2023.

The OBR predicts inflation will hit a 40-year high to 8.7%, with energy bills poised to rise £830 a year from October.

Commenting on the pressures facing households, Linda Ellet, head of consumer markets, retail and leisure at KPMG said: "Those fortunate enough to have saved during the pandemic started the year sitting on the bulk of those savings due to uncertainty.

"But the certainty of rising costs means many will be dipping into those savings to help balance their budget."

Watch: How does inflation affect interest rates?