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UK will suffer higher inflation longer than other countries, Bailey warns

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The governor of the Bank of England warned on Wednesday that the UK economy is suffering more from the energy crisis than any other country.

Andrew Bailey, speaking with other central bankers at the European Central Bank (ECB) meeting in Sintra, Portugal, said the BoE needed an option to raise rates by half a point to tackle inflation, but made no promises of further increases.

But he was adamant that the BoE would curb sharp price increases, even if it meant pain for households. “What’s important to us is getting inflation down to our target, and that’s what we’re going to do,” Bailey said.

The Governor’s remarks underscore how he and the BoE think it will be necessary for households to suffer financially if the UK is to raise inflation from 9.1% in May to its target of 2%.

The BoE said it expects inflation to rise more than 11% in the fall.

Bailey refused to attribute this year’s worsening economic outlook to Brexit or a weaker pound against the dollar. However, he added that the currency depreciation did not surprise him as it reflects a weak outlook for the UK economy.

“It seems that the UK economy is probably getting weaker earlier and somewhat weaker than in other countries,” Bailey said. Along with the UK problem of people leaving the labor market, he explained, is the problem with the energy price shock facing all European economies.

Bailey said recent inflation data saw a shift in the cause of high inflation from high commodity prices, which were in short supply since Covid-19, to goods and services impacted by Russia’s invasion of Ukraine.

He said inflation will persist at higher levels in the UK than elsewhere, prolonging the suffering for households across the UK.

“Unfortunately, UK inflation will rise further later this year,” Bailey said, “as the energy price cap is a product of the way it interacts with energy prices we have observed over the past few months,” Bailey said.

He said the slow-moving energy price cap to reflect rising gas prices in the US will widen the gap between rising inflation in the UK and lower interest rates in most of Europe later this year.

“I would imagine it would take a little more persistence. [into the UK inflation rate] And we’ll have to account for that,” Bailey said, noting that the BoE will examine underlying price pressures when it sets rates.

Monetary policy tightened from 0.1% in December last year to 1.25% in June. Financial markets are expecting rates to rise further by around 3% within a year.

Bailey said this latest market expectation is steeper than the previous BoE forecast suggested because it contains risk factors, and risks to both inflation and interest rates remain on the upside.

“I agree with that.” He said the market is adequately assessing the risk that it will have to rise higher than expected.

suggestion

As Bailey speaks in Portugal, LSE professor Swati Dhingra, who will join the Monetary Policy Committee in August, told the Finance Committee there is room for a “very gradual approach” to raising interest in a more dovish tone as evidence. Rates given the latest data on consumer confidence.

Dhingra said last month’s decision to raise rates by 25 basis points instead of 50 basis points showed that the MPC was operating on a small scale compared to the larger interest rate movements during the financial crisis.

She added that she favors a “very subtle” response to an evolving situation, given the latest data that consumer confidence is at its lowest level in half a century.

Further reporting by Delphine Strauss

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