Andrew Bailey, Governor of the Bank of England, told MPs he was “very worried” about the inflation situation in the UK as supply chain bottlenecks affected the reprise.
Bailey is testifying before the Treasury Committee about this month’s interest rate decision, where the BoE left the cost of borrowing unchanged.
When asked how uncomfortable he felt about the MPC’s decision to leave the bank rate at 0.1%, Bailey replied:
I am very worried about the inflation situation.
This is not, of course, where we want it to be, to have above target inflation.
Inflation was 3.1% in September, above the Bank’s 2% target. It should continue to climb and reach 5% by next April.
But on the decision itself, Bailey says it was a very close call for him to personally vote to leave rates on hold (this was a 7-2 split, despite the fact that many investors expected an increase).
The UK economy faces a lot more “bilateral risks” than ever before, says Bailey – with weaker growth on one side and rising inflation on the other.
Growth has started to flatten out – in part because the UK is approaching the point where it has recovered production lost in the pandemic.
But there are also side effects on the supply. We’re now seeing supply bottlenecks that are really weighing on growth, and we’ve been seeing that since the summer, Bailey explains, adding:
On the other hand, inflation has accelerated further, and the main reason why … is in the area of energy prices.
But it also obviously comes from the world prices of traded goods. These bottlenecks are there too.
Bailey explains that the rebalancing of demand from goods to services following pandemic lockdowns has not happened as quickly as expected, straining supply chains and pushing inflation higher .
These things should be temporary, and in fact seem temporary, Bailey adds, stressing that monetary policy cannot solve such problems (rising interest rates don’t create more natural gas or computer chips).
Bailey also points out that the “big deal right now” is that the job market looks tight, with a risk that it could lead to higher wages and medium-term inflation expectations.
But the real headache is what happened when the leave program ended at the end of September. In the end, there were more people using the program than the bank expected, Bailey says.
Anecdotes suggest that coming out of leave hasn’t raised unemployment, but we don’t know that yet, Bailey says.
So while it was a “finely balanced decision,” Bailey preferred to keep rates unchanged this month. By the December meeting, the Bank will have seen two unemployment reports (from tomorrow) which should show how the labor market has behaved after the holiday.
Bailey appearing with the chief economist Huw pill, and the external members of the Monetary Policy Committee Catherine mann and Michael saunders.