Interest rates may have to be raised higher than initially expected to tackle inflation, the governor of the Bank of England has suggested.
It comes as Andrew Bailey said that he spoke to the new British finance minister Jeremy Hunt on Friday and had an “immediate meeting of minds”.
In a speech in Washington, Mr Bailey reiterated that bank officials will “not hesitate” to raise interest rates if necessary to tackle inflation, while warning that a “stronger” response than previously anticipated could be required.
Public comments by Mr Bailey have taken on increased significance in recent weeks, after the British government’s mini-budget spooked the markets, sent the pound plummeting and forced the independent Bank of England to intervene in a bid to restore financial stability.
The political and economic chaos unleashed by then-finance minister Kwasi Kwarteng’s tax-cutting budget eventually culminated in his sacking on Friday by prime minister Liz Truss, as she continues in her bid to restore her Government’s fiscal credibility.
Mr Hunt will now deliver a fiscal plan at the end of the month, a statement the new chancellor has admitted will be more akin to a full budget.
Andrew Bailey sets out the key elements of UK monetary and financial stability policy in his speech today at the @GroupofThirty International Banking Seminar #IBS2022G30 https://t.co/uNUR4Fi9nE pic.twitter.com/OPzlP5dgFZ
— Bank of England Press Office (@BoE_PressOffice) October 15, 2022
In his short address, Mr Bailey acknowledged what he called the “violent moves” in the UK markets as he signalled that interest rate could be in line to increase again.
On September 22nd the bank’s Monetary Policy Committee (MPC) raised rates by 0.5 percentage points to 2.25 per cent.
Speaking at the G30 annual international banking seminar, Mr Bailey said: “The UK government has made a number of fiscal announcements and has set October 31st as the date for a further fiscal statement.”
He said that the bank’s monetary policy committee “will respond to all this news at its next meeting in just under three weeks from now”.
Mr Bailey added: “This is the correct sequence, in my view. We will know the full scope of fiscal policy by then but I will repeat what I have said already: We will not hesitate to raise interest rates to meet the inflation target.
#G30 member @elerianm discusses the "reemergence of the bond vigilantes" following recent market turmoil in the UK. Read full article here: https://t.co/5F7Oiih5pT
Advertisement— Group of Thirty (@GroupofThirty) October 14, 2022
“And, as things stand today, my best guess is that inflationary pressures will require a stronger response than we perhaps thought in August.”
Taking questions after his address, Mr Bailey said: “I can tell you that I spoke to Jeremy Hunt, the new chancellor, yesterday.
“I can tell you that there was a very clear and immediate meeting of minds between us about the importance of fiscal sustainability and the importance of taking measures to do that.”
He continued: “It’s not appropriate for me to constrain the choices he makes, but the very clear message I would give, and it is a clear message for everybody, including a clear message for markets…
“I can tell you there is a very clear and immediate meeting of minds on the importance of stability and sustainability.”
Mr Bailey, who was intentionally circumspect in his comments, said his statement on Monday after the mini-budget was not something he was in “the habit of doing”.
“I thought I had to,” he said.
In brief remarks on fiscal policy that he said were relevant to the central bank, he spoke of the value of the “sustainability of fiscal policy”.
He also focused on “the need in our case to have the Office for Budget Responsibility (OBR) involved, that flying blind is not a way to achieve sustainability.
“For me the OBR is now very much back in the picture.”
