Bank of England Governor Andrew Bailey warns interest rates may have to rise again to tackle inflation

Governor of the Bank of England Andrew Bailey has today warned interest rates may need to rise even higher to tame inflation, signalling yet more pain is in store for families and businesses.

Speaking at a conference on the cost of living crisis in London, Bailey, 63, said if the Bank does “too little with interest rates now, we will only have to do more later on”.

Bailey and the rest of the monetary policy committee (MPC) have already hoisted borrowing costs at the fastest pace since the 1980s, lifting them ten times in a row to a 15-year high of four per cent.

Cumulatively, since December 2021, rates have climbed nearly 400 basis points, breaking the UK free from over a decade of record low borrowing costs of nearly zero per cent.

Bailey has spearheaded that tightening cycle to tackle inflation, which has raced ahead to its highest level in over 40 years. 

The rate of price increases peaked last October at 11.1 per cent and has since dropped three months in a row to 10.1 per cent. 

Analysts reckon a combination of the Bank’s rate increases and energy prices falling rapidly could push inflation back down to Bailey’s two per cent target by the end of the year.

Expectations of a quick inflation decline this year had prompted market participants to bet the Bank is close to ending its rate hike campaign at its next meeting on 23 March with a final 25 basis point rise.

However, a batch of data recently signalling the UK economy is responding strongly to tighter financial conditions and may even avoid a recession has triggered an upward shift in markets’ peak rate expectations to nearly five per cent.

Interest rates have already risen rapidly

Bailey hinted today the MPC is concerned about elevated inflation entrenching in Britain if they take their foot off the brake too soon.

“The experience of the 1970s taught us that important lesson,” he said, referring to a dynamic in which businesses hiked prices to offset soaring energy costs, prompting workers to demand pay rises, forcing firms to raise prices further still.

That cycle was mainly engineered by expectations on where future inflation was heading, rising steeply. Current expectations have climbed above their historical norm, but nowhere near the extent to which they rose in the 1970s.

The Governor did sound a note of caution about piling too much pain onto the economy, which could ultimately push inflation below their two per cent target in the coming years by crushing spending.

“We have to monitor carefully how the tightening we have already done is working its way through the economy to the prices faced by consumers,” he said.

“Some further increase in Bank Rate may turn out to be appropriate, but nothing is decided.”

“We need to calibrate monetary policy with great care to return inflation to target sustainably. That is the best contribution monetary policy can make to a fair society,” he added.

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said the MPC is now “placing more emphasis on the substantial tightening already delivered and would like to call time on its hiking cycle as soon as it feasibly can”.