Bailey pledges to bring UK inflation back down to 2% target

Bank of England governor Andrew Bailey on Tuesday pledged to bring down inflation to the BoE target, “no ifs or buts”, adding that the central bank could raise interest rates more sharply than previously in response to surging price rises.

Talking at a meeting organised by OMFIF, a central banking think-tank, Bailey said that the monetary policy committee “will be particularly alert to indications of more persistent inflationary pressures, and will if necessary act forcefully in response”.

He added that “bringing inflation back down to the 2 per cent target sustainably is our job, no ifs or buts”.

UK inflation reached a 40-year high of 9.1 per cent in May and the BoE projects it to increase further, to above 11 per cent by October.

Bailey said the bank used the word “forcefully” because “we want people to see that there are more options on the table than another 25 basis points”.

The BoE has raised interest rates by 25 basis points five consecutive times to 1.25 per cent.

Markets have priced a 60 per cent probability of a 50 basis points interest rate increase at the next BoE monetary policy announcement on August 4, with a 40 per cent probability of another 25 basis points rise.

The US Federal Reserve has tightened monetary policy more aggressively, with a 75 basis points increase in June, the biggest jump since 1994.

Bailey said that the Federal Reserve and the European Central Bank were facing different types of price pressures, with the UK placed in the middle. He explained that the UK had “the labour market shock” in common with the US, and both the BoE and the ECB were facing the shock resulting from surging energy prices after Russia’s invasion of Ukraine.

He reiterated that businesses were still very focused on the difficulty of recruiting and that the BoE “is very focused on that point”, suggesting the risk of a more persistent domestic inflationary pressure.

Bailey said that the BoE would set out plans for reversing quantitative easing at the next meeting, emphasising that the bank aimed to make the move “gradual and predictable”.

He also reassured that the bank “would not sell gilts actively in very distressed markets” when asked if it would start selling bank assets in August, a period of high political uncertainty as the Conservative party selects a new prime minister following the resignation of Boris Johnson.

“Getting a predictable path of active sales means that the market should be able to discount that,” he explained.

Bailey added that the central bank balance sheet “should not remain permanently large”.

The governor used his speech to focus mostly on longer-term questions facing the UK economy, particularly the accounting of intangible assets and their role in the missing investment puzzle. He said his comments did not represent a signal about the BoE’s next moves.