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High inflation to persist in UK longer than elsewhere, warns Bailey

The governor of the Bank of England warned on Wednesday that the UK economy is suffering more from the energy crisis than other countries, where inflation in the UK is likely to continue rising for longer.

Speaking to other central bankers at a European Central Bank conference in Sintra, Portugal, Andrew Bailey said the BoE needed the option of half-point rate hikes to tackle inflation, but was not committed to further hikes. .

But he was adamant that the BoE would curb rapidly rising prices, even if it meant hurting households. “The most important thing for us is to bring inflation back to target and that’s what we’ll do,” Bailey said.

The governor’s comments underline how imperative he and the BoE believe it will be for households to suffer financial pain if the UK wants to bring inflation, which hit 9.1 percent in May, to the 2 percent target.

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

Bailey declined to attribute the deteriorating economic outlook to Brexit or the decline of the British pound against the dollar this year. But, he added, the currency’s fall hadn’t surprised him as it reflected the weak economic outlook for the UK.

“I think the UK economy is probably weakening earlier and a little more than others,” said Bailey, who attributed the problems to the energy price shock affecting all European economies, in addition to the UK’s problem of people leaving the labor market.

Bailey said in the latest inflation data he had seen a shift in the causes of high inflation from high prices of goods scarce after Covid to goods and services affected by Russia’s invasion of Ukraine.

He said inflation in the UK would remain higher than elsewhere, prolonging the pain of households across Britain.

“Unfortunately, there will be a further rise in inflation in the UK later this year, as that is a product of the way the energy price cap interacts with the energy prices we’ve been observing in recent months,” Bailey said.

He said the energy price cap, which moves slowly to reflect gas price increases in the US, would widen the gap between higher inflation in the UK and lower tariffs in much of Europe later this year.

“I can imagine that will give you a little more perseverance” [into the UK inflation rate] and we’ll have to explain that,” Bailey said, noting that the BoE would look at underlying price pressures when setting interest rates.

Monetary policy has tightened from 0.1 percent in December last year to 1.25 percent in June. Financial markets expect interest rates to rise further to around 3 percent in a year’s time.

Bailey said this latest market outlook seemed steeper than previous BoE forecasts suggested, because there was an element of risk in it, and risks to both inflation and interest rates were still on the upside.

“I agree,” he said, referring to the markets correctly pricing in the risk that rates would have to rise more than expected.

While Bailey spoke in Portugal, Swati Dhingra, the LSE professor who will join the Monetary Policy Committee in August, spoke a more calm tone as evidence to the Treasury committee, saying there was scope for a “very gradual approach” to arouse interest. rates, given the most recent consumer confidence data.

Dhingra said last month’s decision to raise interest rates by 25 basis points instead of 50 showed the MPC was operating in a narrow range compared to the larger interest rate moves it had made during the financial crisis.

She added that in light of the latest data — which showed consumer confidence at its lowest point in half a century of records — she favored a “very nuanced” response to the changing situation.

Additional reporting by Delphine Strauss

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