The governor of the Bank of England has warned it will “have to act” to curb rising inflation, sending a new signal that it is gearing up to raise interest rates.
Bailey said he continued to believe the recent jump in inflation would be temporary, but he predicted a surge in energy prices would push it higher and make its climb last longer, increasing the risk of higher inflation expectations.
“Monetary policy cannot solve supply-side problems – but it will have to act and must do so if we see a risk, particularly to medium-term inflation and to medium-term inflation expectations,” Bailey said on Sunday during an online panel discussion organised by the Group of 30 consultative group.
“And that’s why we at the Bank of England have signalled, and this is another such signal, that we will have to act,” he said. “But of course that action comes in our monetary policy meetings.”
The Bank has forecast that the UK’s inflation rate will rise above 4% by the end of the year, more than double its target, as the world economy reopens from its Covid-19 lockdowns, causing shortages of supplies and staff, and the price of energy soars.
Investors are speculating that it might become the first of the world’s biggest central banks to raise rates, this year or early in 2022.
Bailey said demand for workers in the UK had been stronger than expected and the number of younger and older workers leaving the labour market had grown. “I do have concerns about labour supply growth,” he said.
But Bailey said he did not believe there was a “general pattern of labour market pressure” as wages climbed strongly in some sectors but less so in others.
He also said there were lessons for governments seeking to prevent future supply chain shocks in the way financial regulators had responded to the shock of the global financial crisis of 2007-09, including regular stress tests.
“I’m not saying we have the magic answer to supply chains across the board, but I think there are lessons that we have learned, in terms of resilience, that can usefully be adapted and used and translated into some other markets, particularly for instance when I look at energy supply,” he said.