Soaring inflation will hit the UK harder than any other major economy during the current energy crisis, the governor of the Bank of England has warned. Andrew Bailey has said that Britain's economy would likely weaken earlier and be more intense than others as a result of the energy price shock that all European economies faced.
The situation was further exacerbated in this country by the “structural legacy” left by Covid in the labour market as companies struggled with a shortage of workers. Mr Bailey told a European Central Bank (ECB) conference in Sintra, Portugal: “Unfortunately, there is going to be a further step-up in UK inflation later this year because that’s a product of the way the energy price cap interacts with the energy prices we have observed over the last few months. I think the UK economy is probably weakening rather earlier and somewhat more than others.”
The governor said that in the latest inflation data he had seen a shift in the causes of high inflation from high prices of goods that were in short supply after Covid-19, towards goods and services affected by Russia’s invasion of Ukraine. To address inflation, the Bank of England needed the option of half-point interest rate rises.
“There will be circumstances in which we will have to do more. We’re not there yet in terms of the next meeting. We’re still a month away, but that’s on the table. But you shouldn’t assume it's the only thing on the table,” Mr Bailey added. “The key thing for us is to bring inflation back down to target and that is what we will do.”
The Bank of England has so far raised rates five times since December.
Mr Bailey's comments came as the head of the ECB said it would move gradually to combat soaring consumer prices with interest rate hikes in July and September, but would keep its options open to “stamp out” inflation if it surged ahead faster than expected.
Christine Lagarde, president of the European Central Bank, said Russia’s war in Ukraine had led to surging energy and food prices that were higher than those seen in the 1970s and 80s, and “given its energy dependence, the euro area is experiencing these shocks acutely”.
“The size and complexity of these shocks are also creating uncertainty about how persistent this inflation is likely to be,” she said. The ECB has already announced it will issue its first interest rate hike in 11 years at its meeting next month. It will also raise rates in September but is leaving the option open for a bigger hike than the quarter-point increase in July, in case inflation keeps spiking.
