Prices may not fall back to where they were before the cost-of-living crisis began despite inflation plunging, warns Bank of England Governor Andrew Bailey.
He said that consumer price index inflation has dropped from a high of 11.1% to 4% over the last 14 months, as the effects of global events like Russia’s invasion of Ukraine and the post-Covid surge in demand have worn off, and high interest rates have cooled the economy.
Although falling inflation is welcome, when answering questions from Express readers, Bailey warned that this will not necessarily translate into prices falling back to where they were prior to the cost-of-living crisis.
“The speed of price increases – inflation – has slowed a lot already. It peaked at over 11% following some very big global events and is now at 4%,” he explained.
“But that means that, on average, prices will be rising less quickly, it doesn’t mean that prices will return to where they were a couple of years ago.”
Bailey added that even though inflation is falling, individuals and businesses are still finding times tough due to rising prices. The Bank, which today kept its base rate at 5.25%, has used high rates to in an effort to bring inflation back to its official 2% target and Bailey said it is working.
“It’s our job to get inflation all the way back to 2% and keep it there. We’re getting closer to that,” he said.
Bailey added that despite the rise of cryptocurrencies and the increased prevalence of contactless payments, the Bank will continue to provide physical money for as long as people still want to use them. “With or without a digital pound, we will supply banknotes for as long as people want to use them.”
Separately, Bailey defended the Bank’s previous forecasts of recession as being appropriate for the time and based on the best information available. He added that the UK’s economic resilience was pleasing.
“Our forecasts were based on expectations for interest rates, energy prices and government policies at the time. As those conditions change, our forecasts have to reflect that. You may remember that there were real concerns last winter that we might run short on energy supplies,” he explained.
“That pushed energy prices up a lot, but in the end, it didn’t happen and those prices came down. And I, like many others, was pleased to see that the UK economy has proved more resilient than expected. That’s good news; not something that has cost anyone anything.”
When will the cost of living crisis end and will prices go back to normal levels?
Inflation is falling but it’s still too high and I know people are feeling the pinch. As part of my job I travel up and down the country speaking with businesses and individuals, and I know how hard this period has been for many. The speed of price increases – inflation – has slowed a lot already. It peaked at over 11% following some very big global events, and is now at 4%. But that means that, on average, prices will be rising less quickly – it doesn’t mean that prices will return to where they were a couple of years ago. It’s our job to get inflation all the way back to 2% and keep it there. We’re getting closer to that.
Why is the mortgage rate so much higher than the savings rate?
The interest rate banks charge on mortgages and loans is usually higher than the rates they pay out on deposits. This is one of the ways that banks cover their costs and make profits. But the difference will change over time, as economic conditions change. Savers have had a tough time of it with interest rates so low for much of the past fifteen years. But that’s now changed. For customers who can lock their savings away for a year or two, interest rates are on average above 4%, which is closer to the most competitive mortgage rates currently on offer. To make sure you find the best savings rates available, I’d encourage readers to shop around, and vote with your feet when the rates on offer are better elsewhere.
What made you hold rates so low for so long? Doesn’t this cause boom and bust? Wouldn’t small incremental increases over ten years would have kept the lid on inflation?
We use interest rates to steer the economy. When inflation is low, we lower rates to stimulate activity in the economy. When inflation is high, we raise them to dampen that activity. For long periods of the past decade, inflation was very low. Often it was at or below our target of 2%, which is why we kept rates low.
The inflation we’ve seen over the past two years wasn’t caused by low interest rates. It had some very clear causes, including the recovery from the Covid pandemic and the war in Ukraine. We’ve needed to raise interest rates to stop that inflation getting stuck in the UK economy and lasting longer than it needed to. It’s good news that inflation has fallen back so much over the past few months. The upward pressure on prices from global events is wearing off, and higher interest rates are working.
Why do you print money from nothing and charge us interest upon it thereby creating an economy based on debt?
After the global financial crisis of 2008, the Bank of England – like many central banks around the world – started a program of ‘quantitative easing’. This is sometimes described as ‘printing money’, though that’s not a very accurate description. It’s a process of buying government bonds with newly created money in order to bring down borrowing costs across the economy. QE has been an important tool for supporting the economy through shocks like the aftermath of the banking crisis and Covid when interest rates were already set very low.
Why are we producing more and more millionaires when most of us are skint?
That’s an important question about the distribution of income and wealth in the economy, but it isn’t something within my remit as Governor of the Bank of England. Our role is to ensure low and stable inflation, and a stable financial system. Those benefit everyone. One of the reasons that high inflation is so bad is that its burden falls disproportionately on those least able to bear it – those with the lowest incomes and least secure employment.
The Bank and other financial bodies previously predicted the UK would enter the worst recession for years. Those remarks were obviously wrong. How much do you estimate those remarks cost the UK? And what are you going to do about it?
Our forecasts in late-2022 were based on expectations for interest rates, energy prices and government policies at the time. As those conditions change, our forecasts have to reflect that. You may remember that there were real concerns last winter that we might run short on energy supplies. That pushed energy prices up a lot, but in the end it didn’t happen and those prices came down. And I, like many others, was pleased to see that the UK economy has proved more resilient than expected. That’s good news; not something that has cost anyone anything. Over the last few years we’ve experienced a series of very serious shocks – a global pandemic, the war in the Ukraine – which we could not have predicted. However we have appointed an independent expert to review our forecasts to understand what we can learn from past experiences like this.
The US government owes $34 Trillion, the UK owes £2.7trillion, EU nations are trillions in debt, are all these countries borrowing beyond their means and does this pose a risk to the global economy?
The sustainability of borrowing is a question for governments rather than central banks. We set out our assessment of risks to the UK economy twice a year in our Financial Stability Report. And in the most recent one from December, high debt levels in major economies, including public sector debt, was one of the things we highlighted as a potential risk to UK financial stability. But it’s our job at the Bank of England’s to ensure that the financial system is prepared for and resilient to these sorts of risks, so it can continue to serve UK households and businesses. And our view is that it has the capacity to do so, even if the economic outlook were to be substantially worse than expected.
What problem is the Bank of England trying to solve with a central bank digital currency that hasn’t already implemented and operated by others?
Alongside the Government, we are examining the case for a digital currency, though no decision has been made on whether to go ahead with it. And you are right, we would only go ahead if we are confident that it meets a need. On that, it could support innovation and efficiency in how we pay for things in future.
The crypto-currencies that currently exist aren’t currencies. They are highly speculative and their values fluctuate a lot because they’re not backed by anything. A digital pound would be issued and backed by the Bank, so £10 of a digital pound would always be worth the same as a £10 banknote. With or without a digital pound, we will supply banknotes for as long as people want to use them. Readers can look out for our new King Charles banknotes entering circulation, later this year.