The governor of the Bank of England has signalled that interest rates will need to rise towards 1% in the coming months and rejected suggestions that his team of policymakers “bottled it” by failing to impose a widely expected increase.
Speaking to BBC Radio 4’s Today programme on Friday, Andrew Bailey said interest rates would rise when a clearer picture emerged about the end of the furlough scheme and unemployment.
Bailey is facing criticism about poor communications in the run-up to this week’s interest rates decision. His comments over recent months had been interpreted as signals that the Bank of England would be the first major central bank to raise rates since the beginning of the pandemic.
On Friday, Bailey said that while the Bank’s monetary policy committee (MPC), which he chairs, would seek more data before making any decision, Threadneedle Street was already on a path of rising interest rates.
He said the MPC would not “bottle it” when it next meets in December if a wide range of data showed labour shortages had led to high wage demands.
“We expect interest rates to rise and we are very clear,” he said. “If you ask the question why haven’t you done it now, the answer is all to do with the labour market … there were a lot more people using the furlough scheme right up to the end.
“The labour market looks tight in this country at the moment but the missing piece of evidence is just what has happened after the end of the furlough scheme and we don’t have any data to guide us on that,” he added.
On Thursday, the MPC surprised financial markets by holding interest rates at 0.1%, despite raising its forecast of inflation to 4.5% by the end of the year and 5% in early 2022. Threadneedle Street’s remit is to keep inflation at about 2%.
The pound fell further against the dollar on Friday, to $1.3471, adding to Thursday’s heavy losses of almost two cents.
Asked whether interest rates would rise as high as 1%, Bailey said: “Interest rates need to rise … I’m not going to endorse 1%, but … it’s correct to think in those terms.”
Sir Dave Ramsden, a deputy governor of the Bank and one of two officials to vote in favour of a rate rise on the nine-strong MPC, said he was concerned that workers would begin to think inflation was running out of control and respond by asking for higher wages.
“Although inflation expectations remain well anchored at the moment, action now will make sure they stay well anchored,” he said.
The Bank’s chief economist, Huw Pill, who voted to keep rates on hold, said he sympathised with Ramsden’s assessment but feared that higher borrowing costs at the moment would damage the recovery from the pandemic “in a misguided attempt to clampdown on short term price pressures”.
In the wake of the BoE’s decision the pound fell more than 2% to below $1.35, but Bailey’s robust comments during a round of media interviews appeared to put a floor under the currency.
Some economists said the pound could tumble as much as 8% over the next few weeks after markets were disappointed by the rate rise.
Bailey was accused of a failure of communication after saying last month that the MPC would need to take action to bring down inflation. On Friday, his message was that interest rates could do little to combat price rises caused by labour shortages and supply chain problems. “Raising interest rates won’t produce more gas, it won’t produce more semiconductor chips,” Bailey said.
“Where we have to use interest rates is where we see the potential for demand to rise or the potential for wage pressures to come into play, which can be self-perpetuating and we will do that.” He added: “Inflation is clearly something that bites on people’s household income and they will feel that.”
