The Bank of England’s chief Andrew Bailey predicts a rise in interest rates next year. Speaking to the Society of Professional Economists in London, Bailey said there were signs that inflation could be sustained and the central bank’s monetary policy committee (MPC) may need to increase borrowing costs in 2022. He said with inflation at 3.2 per cent and heading above four per cent, inflationary pressures appeared to be worsening rather than improving.
Bailey said, “All of us believe that there will need to be some modest tightening of policy to be consistent with meeting the inflation target sustainably over the medium term. Recent evidence appears to have strengthened that case but there remain substantial uncertainties and we are monitoring the situation closely.”
He said a major challenge for the BoE would be to distinguish between one-off increases in price levels and factors that could cause a longer-term increase in the annual rate of inflation. “Monetary policy should not respond to supply shocks which do not become generalised through their impact on inflation expectations,” he said. The MPC voted to keep interest rates at 0.25 per cent and its £875bn stimulus programme in place last week after concerns that a rebound in economic growth since the early part of the year was beginning to pan out.
The committee said it was concerned that there were more people on the government furlough programme than the Bank predicted in its August health check on the economy. Bailey played down the prospects for a return to previously high levels of growth. He said, “I, and other MPC members, have used the analogy of a bridge to describe the role of economic policy in the age of Covid, the bridge to the other side of Covid. We are still on that bridge. The rate of recovery has slowed over recent months, and that slowing is continuing. Relative to the fourth quarter of 2019, on the latest data to July, the level of GDP was 3.5% lower.”
He added, “That’s around one percentage point below the level consistent with the August monetary policy report. It is inevitable in a bounce-back that the growth rate will slow as the recovery nears its end point. It is not, though, inevitable – or desirable – that the previous level is not regained.”
